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Stocks 501: Constructing a Portfolio

Introduction to Constructing a Portfolio The Fat-Pitch Approach Portfolios: What Do the Academics Say? How Many Stocks Diversify Unsystematic Risk? Portfolio Weighting and Portfolio Turnover Circle of Competence and Sector Concentration Adding Mutual Funds to a Stock Portfolio Summary of Constructing a Portfolio
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Circle of Competence and Sector Concentration

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Circle of Competence and Sector Concentration

If you are investing within your circle of competence, then your stock selections will gravitate toward certain sectors and investment styles. Maybe you work in the medical field and thus are familiar with and own a number of pharmaceutical and biotechnology stocks. Or perhaps you’ve been educated in the Warren Buffett school of investing and cling to entrenched, easy-to-understand businesses.

Things To Know

  • Investing within your circle of competence means gravitating toward certain sectors and investment styles.

Following the fat-pitch strategy, you will naturally be overweight in some areas you know well and have found an abundance of good businesses. Likewise, you may avoid other areas where you don’t know much or find it difficult to locate good businesses.

Beware single-sector investing

However, if all your stocks are in one sector, you may want to think about the effects that could have on your portfolio. For instance, you probably wouldn’t want all of your investments to be in areas such as the airline or auto industry.