Some investors, working with their financial advisers,
choose an asset allocation based on their long-term goals and
modify it only to reflect changes in those goals. Their approach
is to ride out the recurring ups and downs in the markets on the
principle that the risks of investing are reduced over time.
Other investors vary their allocations and the individual investments
in their portfolios in response to changing economic conditions.
One reason for this approach is that in any market some sectors
do better than others. For example, certain sectors carry the
markets to new highs in a bull market, and in bearish markets
there are other sectors that remain strong. Even in a neutral
market, some sectors move ahead while most mark time.
The key, of course, is knowing when to buy and when to sell. That's
why evaluating the markets, and sectors of those markets, is so
important. The problem for most individual investors is a lack
of the tools and the expertise to make sound decisions.
Professional analysts, both
fundamental
and
technical, employ
a range of systems and indicators to evaluate the current market
situation and anticipate future direction. While no single analyst
or tool is right all the time, some seem to be more accurate than
others. What you can do is find an adviser who advocates an approach
that makes sense to you and commit a portion of your total portfolio
to that strategy. Then, if you're comfortable with the results,
you'll feel confident about sticking with it.
Thomas J. Dorsey, President and
co-founder of Dorsey, Wright &
Associates
Tom Dorsey of Dorsey, Wright & Associates sums up why it's important to research the market and sector before investing in a stock.
The cause of price movement in any given stock is predominately a function of market and sector risk. More specifically, 80% of the risk in any given stock is attributable to the market and sector. Yet the typical time allocation for researching a stock is 80% to the actual stock and only 20% to the market and sector.
Professional analysts, both
Thomas J. Dorsey, President and
co-founder of Dorsey, Wright &
Associates 