What are the best industries to invest in? What do you mean? Do you want safety, dividends, growth? The “right” answer isn’t as simple as pointing in the direction of the healthcare industry or the energy industry, for example. And even if it was that easy, that only narrows it down so far.
The retail industry offers a perfect case study. In 2007, Sears (SHLD) shares were selling at 126. Ten years later, the stock was just over 3 per share; five years after that, the company was in Chapter 11 bankruptcy. Lululemon Athletica (LULU), on the other hand, started 2009 at 3.90 per share and ended 2019 at just over 230 per share; now, shares are trading at 380. But let’s back up a minute and look more deeply into the question at hand.
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How to find the best industries to invest in - for you
Here is your official, three-step plan for finding the best industries to invest in.
1. Determine what kind of investor you are.
There are several approaches to investing, and there are a lot of factors that go into determining the best approach for an individual investor. Many people who invest primarily for income are doing so with an eye toward building wealth for retirement. These investors who want yield without (too much) risk have been successful with high-dividend blue-chip stocks. Telecoms AT&T (T) and Verizon (VZ) are two good examples.
Growth investors, on the other hand, love a good gamble. Growth stocks often outpace the market, and the best ones can earn triple-digit returns in a short amount of time. The caveat to being a growth investor is that the companies you invest in are less mature, have smaller margins, and often don’t pay a dividend. Thus, the stocks can be very volatile, especially around earnings season. But for a growth investor, the risks of investing in these stocks are worth the potential rewards.
Value investors like to find stocks that are selling at a price that is below their current value, or worth. These may be investments in companies that the market has overlooked or that have simply fallen out of favor, replaced with newer, “sexier” stocks in the minds of investors. Value investing is about recognizing opportunities and spotting deep discounts.
There are, of course, variations and mixtures of these, but starting with these general baselines will help you get your bearings.
2. Determine your risk tolerance.
One way to think about risk is as the range of potential outcomes from making a specific investment, and the probability of each happening. For example, there’s a small chance that any given high-risk investment could lose 50% of its value fairly quickly and a medium chance that it could lose 30% of its value. If these risks are acceptable to you, you’re a high-risk investor (by our definition).
Considering the likelihood of positive scenarios is also important. A lot of retired investors assume they should only be investing in conservative, low-risk investments because of their age, but fail to consider whether such strategies will help them meet their goals. For example, the lowest-risk strategy possible would be keeping your savings 100% in cash.
3. Set your goals.
What are your goals? Do you want a steady source of dividend income in retirement? Are you investing to pay for a child’s college or to leave them an inheritance? Do you want to make big money in short order? Setting your goals will help you determine which are the best industries to invest in to help you meet those goals.
The moment you’ve been waiting for
Okay, so now that we have a plan, what are the best industries to invest in? Bearing in mind that this is a somewhat trick question, here are the general characteristics of some different industries.
The consumer staples industry
Although there can be volatility, the consumer staples sector is a great place to find stocks that don’t jump around too much. Consumer staples are things like groceries, personal care products and household items that people tend to buy regardless of economic conditions. The sector includes many high-quality, blue-chip stocks, like Procter & Gamble (PG) and Colgate Palmolive (CL).
The utilities industry
Utilities have a reputation for reliability and are known for being low risk—they’re often called “widow and orphan stocks” because they’re appropriate for just about any investor. Utilities deliver slow but steady growth and take advantage of that predictability to pass much of their cash through to investors as regular dividends.
And right now, our dividend expert Tom Hutchinson is recommending two utility stocks in particular.
The marijuana industry
Marijuana is the fastest-growing industry in America. The stoner culture and big business seem like an odd match. But it’s no joke. It’s big business.
With recent developments around rescheduling and SAFE banking, it promises to be one of the hottest stock market sectors in the coming years, and good marijuana investments are all around.
Resident cannabis expert Michael Brush has a handful of good-looking marijuana stocks in his Cabot Cannabis Investor portfolio, as well as ETFs for investors looking for a more diversified angle.
Remember, the best industry to invest in is like looking for the best restaurant in San Francisco. There are so many options, and so many ways to hone in on what works best for you.
Do you have a favorite industry to invest in, or questions about a specific industry? Do you feel like you understand the best industries to invest in, or do you want to know more? Leave your questions below.
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*This post was first published in 2020 and is periodically updated to reflect current market conditions.