One of the ways investors classify stocks is by type of business. The idea is to put companies in similar industries together for comparison purposes. Most analysts and financial media call these groupings “sectors” and you will often read or hear about how certain sector stocks are doing.

One of the most common classification breaks the market into 11 different sectors. Investors consider two of there sectors “defensive” and the remaining nine “cyclical.” Let’s look at these two categories and see what they mean for the individual investor.

Defensive


However, for all their safety, defensive stocks usually fail to climb with a rising market for the opposite reasons they provide protection in a falling market: people don’t use significantly more energy or eat more food.

Defensive stocks do exactly what their name implies, assuming they are well run companies. They give you a cushion for a soft landing in a falling market.

Cyclical stocks

Cyclical stocks, on the other hand, cover everything else and tend to react to a variety of market conditions that can send them up or down, however when one sector is going up another may be going down.

Here is a list of the nine sectors considered cyclical:

• Basic Materials
• Capital Goods
• Communications
• Consumer Cyclical
• Energy
• Financial
• Health Care
• Technology
• Transportation

Most of these sectors are self-explanatory. They all involve businesses you can readily identify. Investors call them cyclical because they tend to move up and down in relation to businesses cycles or other influences.

Basic materials, for example, include those items used in making other goods – TMT bars, for instance. When the construction market is active, the stock of TMT bars companies will tend to rise. However, high interest rates might put a damper on construction and reduce the demand for TMT bars.

Hence, you need to compare stocks in a particular sector. This is extremely helpful, since one of the ways to use sector information is to compare how your stock or a stock you may want to buy, is doing relative to other companies in the same sector.

If all the other stocks are up 11% and your stock is down 8%, you need to find out why. Likewise, if the numbers are reversed, you need to know why your stock is doing so much better than others in the same sector – maybe its business model has changed and it shouldn’t be in that sector any longer.

You never want to be making investment decisions in a vacuum. Using sector information, you can see how a stock is doing relative to its peers and that will help you understand whether you have a potential winner or loser.

Most of the investors either rely on the advice of a broker who was paid only when they bought or sold stocks or Investors had to dig through mounds of annual reports and an assortment of documents that were months old by the time they got them.

Researching more than a few companies was almost impossible unless you had a huge staff of analysts working for you. Comparing several companies was tedious and difficult. Thank God, the "good old days” are gone forever.

Saral Gyan expert analysts team keep researching stocks (that is, before the Internet). Today, any investor can access powerful research tools using Internet and many of them are free. Of course, there are some very sophisticated tools that come with hefty price tags; however, for most investors all the research they’ll need is free or available for a modest subscription.

Stock Performance, Key Ratios, Peer Comparison & much more, Key factor is time! To derive a decision to buy stock consumes a lot of time.

Sector selection >>>  Market Capital Segmentation >>> Grouping & Stocks selection  >>> Peers Comparison >>> Moderate Research to select 5 Key Stocks >>> Extensive research to finalize 3 out of 5 >>> Debate & discussion to derive the Best 1 out of 3 for Portfolio Investment.

Most of the basic research tools provide financial reports & Key ratio's analysis with comparing performance of a stock on QoQ as well as YoY basis. They provide analytical data not only for a particular stock but also for a specific sector, and help investors to do a peer group stocks comparison. This handy program does in nanoseconds what would take you hours and hours of research by hand to do – and best of all, there are many of them on the Internet free for you to use. Some of the better ones come as part of subscription packages to the better research sites, but you can get a feel for how they work for free.

The concept is simple. You want to identify stocks that meet certain criteria. (Incidentally, this is how you go about building a portfolio, rather than haphazardly investing in whatever stock looks good at the moment.)

One of the simplest and easiest to use comes from Moneycontrol. Despite its simplicity, the website yields some powerful results.

The stock page lists your results with links to each company. Click on the link and you will get a financial snapshot of the company. It is a good tool to get you started.

A portfolio is a group of financial assets such as stocks and bonds, held by an investor. In today's financial marketplace, investors need to create well-structured portfolios that suit to their investment goals and strategies. There are investors who are risk-takers and investors who are risk-averse. Constructing a portfolio that reflects the investor's risk profile and tolerance is a key factor for effective investment decision making.

Clarifying current situation and future needs for capital, along with risk tolerance determines the asset allocation among different asset classes. Optimal asset allocation is an effective method of diversification. Investors should diversify between different classes of assets but also, within each class. This allows them to incur long-term investment growth, while their assets are protected from the risks of large declines and structural changes in the economy over time.

Another important factor to be considered when constructing a portfolio is the stock volatility. Typically, market fluctuations are subject to interest rates changes, inflation, political turbulence, corporate news etc. Investors should keep an eye both on current developments and broader socio-economic environment and on historical data as these reflect a stock's past performance and assist to a fairly accurate assessment of future performance.

Financial ratios are also important when constructing a portfolio. Price/earnings (P/E), Book value (BV), return on equity (ROE) and total return indicators are highly important tools to assess liquidity, profitability, leverage, capital structure, and interest coverage. Although ratios reflect historical data and past performance, they can also predict future potential and provide lead indications of potential trouble areas.

Optimal portfolios provide the highest possible return for any specified degree of risk. To that end, they need to be revaluated on a regular basis in order to reflect new market realities. Investments should be regularly analyzed and investors should perform reallocation of their portfolio if required.

Finally, investing at regular intervals is a good method to build wealth. Both, risk-takers and risk-adverse investors can smooth out market fluctuations, through rupee-cost averaging that is investing a fixed amount on a regular schedule. This fixed amount automatically buys more shares when prices are low. Consequently, the average purchase price of the stock is lower than the average of the market prices over the same length of time. Although, Rupee-cost averaging does not automatically produce a profit, still by investing on a regular schedule virtually guarantees to do better in a generally rising market than investors who try to time market highs and lows.

As the manager of your portfolio, you need to understand the importance of diversification. There will be periods when some of your holdings will lose money. When that occurs, you need other investments to offset the decline.

Diversification is important to all investors. It’s something that socially responsible investors in particular need to notice because their universe of investment options is smaller than that of traditional investors. When creating a portfolio, it’s important to be sure that the elements within it not only meet your social or environmental concerns, but that they don’t create unwanted risk to your capital by being slanted one way or another.

Asset Allocation

One form of diversification is asset allocation. By having elements of different investment classes in your portfolio - including stocks, bonds, cash, real estate, gold or other commodities - you can protect your portfolio from losing the value that it might if it only contained one failing asset category.

When stock prices fall, for example, bond prices often rise because investors move their money into what is considered a less risky investment. So a portfolio that included stocks and bonds would perform differently than one that included only stocks at the time of a stock market drop.

It’s also wise to diversify within asset classes. Investors who loaded up on tech stocks in 2000 lost their shirts when the dot.com bubble burst and technology shares rapidly fell out of favour. Similarly, financial stocks were hammered down in late 2007 and early 2008 due to the subprime mortgage crisis.

And if it seems risky to put all or most of your money into a single sector, it would be even more so to do the same on a single stock. Investors should not invest entire sum in a single stock (that’s what many investors did in past being an employee of the same company)
 
So the two steps to diversification are to spread your money among different asset categories, then further allocate those funds within each category. A smart approach for individual investors is to diversify using mutual funds. Because mutual funds are groups of stocks, you’ll be diversified to a certain degree by definition.

Getting Started

But you should go one step further by buying different types of funds. Many advisors recommend beginning with a broad-based index fund that merely tries to mirror the performance of Sensex or Nifty. Then you could complement that index fund with a fund that purchases shares in overseas companies; one that consists of shares of small growth companies; one that invests in bonds and another that buys shares in real estate investment trusts (REITs).

At web sites such as moneycontrol, ndtvprofit and valueresearchonline.com, you can find analysis and information about mutual funds to get you started. Remember to notice fees and expenses when comparing funds.

By diversifying your portfolio, you’ll give yourself an opportunity to grow your money despite the ups and downs that come with investing.

Calculated Risk

Once you find yourself ready to take a bit of risk with your investments, invest a small pie of your investments in small and mid cap stocks because investing directly in stocks give a chance to investors to get the maximum returns compared to investment in mutual funds. It will not include any fund manager fee, advertisement cost, entry & exit load and give a chance to investor to earn the maximum in terms of regular dividends, higher dividend yield and appreciation in stock price with scope of stock bonus & split.

Maybe it was the financial planner on CNBC, a casual conversation with a friend, or just the small voice inside, but something has caused you to keep asking yourself the same thing: should I pay off my debt or start investing? This question, perhaps more than any other, has plagued investors for generations. Ironically, it is one that can be easily decided by using a bit of simple math.

Whether it's a mortgage, home loan, car loan, student loan, credit card, or medical bills, you probably have some amount of debt in your life. It is only natural that you want to pay it off as soon as possible. On the other hand, it is understandable that you want to start putting money away for your retirement or your daughter marriage or some other important milestone in your life. Since there is only so much cash to go around, a decision normally has to be made between the two, neither of which leaves a person feeling completely satisfied.

What should you do? The answer depends on two variables:

1. The rate of after-tax interest you are paying on your debt

2. The after-tax rate of return you expect to earn on your investments

Before you answer the first question, you must understand that there are two different kinds of debt. On one end of the spectrum is high-interest credit card debt that originates from things such as credit cards and department store charge accounts. This type is the deadliest and generally should be avoided unless absolutely necessary. The second type of debt is the lower interest variety; your mortgage, student loans, etc. Often, the interest on these types is partially or wholly tax-deductible, making it even more attractive.

With that in mind, the answer to the debt reduction vs. investing problem can be solved with this one statement: If you can earn a higher after-tax return on your investments than the after-tax interest rate expense on your debt, you should invest. Otherwise, you should pay off your balance.

Example of debt reduction vs investing calculation

Scenario 1

Assume you have a thirty year, Rs 15,00,000 mortgage with a six percent rate. Also assume you are in the 30% tax bracket. Due to the itemized deduction of mortgage interest, your after tax annual percentage rate is really 4.02% (not the 6.00% you are paying). Hence, if you expect to earn an after-tax return higher than 4.02% on your investments (odds are substantial you will if you have a long-term horizon), then you should invest.

Scenario 2

You have a Rs 10,000 balance on a credit card with a 22% annual percentage rate. Credit card interest expense is not tax deductible, meaning you should only invest if you think you can earn a 22% after tax return on your investments. Given that the historical long-term return on equities has been somewhere around 11-12%, this seems highly unlikely. In this case, it would be foolish to invest.

The Bottom Line

Although you may be eager to invest, you need to do what is best for your bottom line. Regardless of which is the wiser course of action at this stage in your life, the ultimate goal should be to have no debt and an abundance of great, lucrative investments. With enough patience and hard work, this is a goal that you can, and will, attain.

“Wide diversification is only required when investors do not understand what they are doing.”
 - Warren Buffett (Investment Genius & Philanthropist)

Investing Mistake # 1: Spreading your Investments beyond Indexes

Over the past several decades, Sensex has preached the virtues of diversification, drilling it into the minds of every investor within earshot. Everyone from the CEO to the delivery boy knows that you shouldn't keep all your eggs in one basket - but there's much more to it than that. In fact, many people are doing more damage than appreciation in their investments by the effort to diversify. Like everything in life, diversification can be taken too far. If you split your1000 Rs into one hundred different companies, each of those companies can, at best, have a tiny impact on your portfolio. In the end, the brokerage fees and other transaction costs may even squeeze the profit from your investments. Investors that are prone to this "dig-a-thousand-holes-and-put-a-coin-in-each" philosophy would be better served by investing in an index fund which, by its very nature, is made up of many companies. Additionally, your returns will mimic those of the overall market in almost perfect lockstep.

Investing Mistake # 2: Not Accounting for Time Horizon

The type of asset in which you invest should be chosen based upon your time frame. Regardless of your age, if you have capital that you will need in a short period of time (six month or one year, for example), you should not invest that money in the stock market or equity based mutual funds. Although these types of investments offer the greatest chance for long-term wealth building, they frequently experience short-term gyrations that can wipe out your holdings if you are forced to liquidate. Likewise, if your horizon is greater than ten years, it makes no sense for you to invest a majority of your funds in bonds or fixed income investments unless you believe the stock market is grossly overvalued.

Investing Mistake # 3: Frequent Trading

We can name ten investors on the Forbes list, but not one person who made their fortune from frequent trading. When you invest, your fortune is tied to the fortune of the company. You are a part-owner of a business; as the company prospers, so do you. Hence, the investor who takes the time to select a great company has to do nothing more than sit back, develop a rupee cost averaging plan, enroll in the dividend reinvestment program and live his life. Daily quotations are of no interest to him because he has no desire to sell. Over time, his intelligent decision will pay off handsomely as the value of his shares appreciates.
A trader, on the other hand, is one who buys a company because he expects the stock to jump in price, at which point he will quickly dump it and move on to his next target. Because it is not tied to the economics of a company, but rather chance and human emotion, trading is a form of gambling that has earned its reputation as a money maker because of the few success stories (such stories never tell you about the millionaire who lost it all on his next bet... traders, like gamblers, have a very poor memory when it comes to how much they have lost).

Investing Mistake # 4: Fear Based Decisions


The costliest mistakes are usually fear based. Many investors do their research, select a great company, and when the market hits a bump in the road - dump their stock for fear of losing money. This behavior is absolutely foolish. The company is the same company as it was before the market as a whole fell, only now it is selling for a cheaper price. Common sense would dictate that you would purchase more at these lower levels (indeed, companies such as Pantaloon have become giants because people like a bargain. It seems this behavior extends to everything but their portfolio). The key to being a successful investor is to, as one very wise man said, "...buy when blood is running in the streets."

The simple formula of "buy low / sell high" has been around forever, and most people can recite it to you. In practice, only a handful of investors do it. Most see the crowd heading for the exit door and fire escapes, and instead of staying around and buying up a company for ridiculous levels, panic and run out with them. True money is made when you, as an investor, are willing to sit down in the empty room that everyone else has left, and wait until they recognize the value they left behind. When they do run back in, you will be holding all of the cards. Your patience will be rewarded with profit and you will be considered "brilliant" (ironically by the same people that called you an idiot for holding on to the company's stock in the first place).

Portfolio theory is an investment approach developed by University of Chicago economist Harry M. Markowitz (1927), who won a Nobel Prize in economics in 1990.

Portfolio theory allows investors to estimate both the expected risks and returns, as measured statistically, for their investment portfolios.

Markowitz described how to combine assets into efficiently diversified portfolios. It was his position that a portfolio's risk could be reduced and the expected rate of return could be improved if investments having dissimilar price movements were combined.

In other words, Markowitz explained how to best assemble a diversified portfolio and proved that such a portfolio would likely do well.

There are two types of Portfolio Strategies:

A. Passive Portfolio Strategy:

A strategy that involves minimal expectational input, and instead relies on diversification to match the performance of some market index.

A passive strategy assumes that the marketplace will reflect all available information in the price paid for securities.

B. Active Portfolio Strategy:

A strategy that uses available information and forecasting techniques to seek a better performance than a portfolio that is simply diversified broadly.

Moreover, there are three types of Portfolios:

1. The Patient Portfolio:

This type invests in well-known stocks. Most pay dividends and are candidates to buy and hold for long periods ... Perhaps forever!

The vast majority of the stocks in this portfolio represent classic growth companies, those that can be expected to deliver higher earnings on a regular basis regardless of economic conditions.

2. The Aggressive Portfolio:

This portfolio invests in "expensive stocks" (in terms of such measurements as price-earnings ratios) that offer big rewards but also carry big risks.

This portfolio collects stocks of rapidly growing companies of all sizes, that over the next few years are expected to deliver rapid annual earnings growth.

Because many of these stocks are on the less-established side, this portfolio is the likeliest to experience big turnovers over time, as winners and losers become apparent.

3. The Conservative Portfolio:

They choose stocks with an eye on yield, as well as earnings growth and a steady dividend history.