Go Small When Entering an Unfamiliar Sector

Caution should be an investor’s number one priority when expanding portfolio scope. Examining and testing out new opportunities is necessary for portfolio development. But initial investment should be limited. Every investment sector has behavioral traits. When you do not have experience with these it could lead to large losses.

In 2003, while working in banking, I came across an account that well illustrates the dangers.  The owner had invested heavily in .com technology companies in the late 1990′s and early 2000′s.  Like most of the general public at the time he probably thought the Internet was a sure thing.  By 2003 it had gone down about 50% and produced hundreds of thousands of  dollars in losses.  Judging by how severely the .com boom went bust it likely never recovered.

In November, 2013 gold was arguably a buying opportunity. It had declined roughly thirty-two percent from lofty highs reached after the financial crisis. So, having never invested in precious metals, I purchased some SPDR Gold Trust ETF (NYSE ARCA: GLD).  The total outlay was about one-quarter of one percent (0.25%) of portfolio assets.  It has done little: On  a purchase price of $124.04 the shares have fluctuated between about $102 and $130.

This year the British Pound looks like a buying opportunity.  In the face of Brexit uncertainty exchange rates have been at historic lows.  But I’ve never traded currencies before.  So initial investment was once again very small: about seven-hundredths of one percent (0.07%) of total assets.  The position was opened with Currencyshares British Pound Sterling ETF (NYSE ARCA: FXB) this past June at $128.84.  When it again dropped considerably four months later another purchase was made at $120.65, bringing total exposure to about fourteen-hundredths of one percent (0.14%) of assets.

One school of thought says if you do not put substantial money into a position it is not worth the time.  I disagree.  If you put a small amount of money into an unfamiliar sector and it skyrockets you have a small profit.  If it tanks, perhaps because of something you had not yet learned, the loss will not be devastating.  The fact that it tanked may also present a buying opportunity.  Over time, if it continues to look like a good idea, the position can be expanded.

Be cognizant of what you do not know when entering new investment sectors.  It will help you learn and make more money in the long run.  But putting too much on the table before you have an idea of what is happening could be disastrous.

 

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Articles presented here are general opinions for your own consideration.  They are not specific advice for any one investor.

Commodities, Currencies, Reasonable Prudence in Investing, Sector Investing

Investment Strategy