There is a theory that when it comes to investing, do the opposite of what the herd is doing, because the herd is typically wrong or late to the party. When it comes to certain sectors that are out of favor, at some point you should look at that sector, because it typically comes back around. Not all sectors are hot at the same time and there is always a need for diversification. Here are some things to remember if you want to be a contrarian with some of your portfolio.
- First, when it comes to sectors that are out of favor, I recommend that you use an ETF rather than taking a single stock risk. An ETF will buy many different stocks in a sector. Diversification is your friend in this situation.
- Second, when it comes to the market in general, buy low and sell high. I know this is easier said than done, but when the news is gloomy it’s typically a good time to go against the grain and take a position if your risk tolerance is suitable.
- Third, realize that it may take years for a sector to come back, so look to reinvest dividends while you wait. Reinvesting dividends lets you buy additional shares at a lower level (if the sector is low at the time). These add up over time and add to your total return when that sector is in favor again.
In the end, different sectors do better or worse under different economic environments. Higher rates may favor one sector and hinder another. Just understand that with contrarian investing “every dog has his day”.