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How do I use the Sector Safety Score? Spreading-out investments across sectors to maximize returns
Posted on November 20, 2013 by Victoria Pascoe

So far, we’ve explained how the Safety Scores are calculated and how you can use them to guide your decision making when selecting which stocks to invest in. This week, we thought it might helpful to recap how it works before we dive into an example investment scenario in our next post.

The Sector Index divides our global database into eight specific business sectors and ranks each one with a Sector Safety Score on a scale from 1 to 99. Why such a large scale? We chose this scale because some sectors tend to be more popular than others and these trends often remain constant for a long time. An example is tech companies like Apple or Google: Just because they are very popular with consumers and get tons of good press doesn’t necessarily mean they are good investments for the average investor. The scale helps balance out this “popularity factor” by assessing how the sector is doing as a whole.

The main goal of the Sector index isn’t to highlight sectors that are popular to invest in. On the contrary, we want to explore and highlight sectors and industries that are currently less visible because investing in these sectors can allow you to buy stocks at a more attractive purchase price and, ideally, achieve a positive return from adopting a long term investment strategy.  Traditional sectors that don’t get much press coverage can be unfamiliar territory for average investors but they often make for great investments. For example, picking stocks in the mining industry can be good investment, but new investors might find it difficult to figure out which stocks to pick because they aren’t familiar with the industry. MPI has developed tools to help make this step easier!

Keep in mind, the color scale and numbers of the Safety Score don’t necessarily represent high performance—- they represents the relative “safety” of the sector. So while a certain sector may or may not be currently popular among investors, we rank sectors based on how safe they are – that is, allowing for wealth preservation and long term financial growth with minimal risk. The higher the score, the more attractive that sector is for long-term investment.

For example, if you check out the Sector Safety Scores, you will find that at the time of this post, the Financial Sector has a low safety score, even if the stocks within the sector are performing quite highly. On the contrary, Basic Materials, currently a much safer sector, has stocks that are performing well, albeit less rapidly; we calculate this sector to contain stocks which are safer long-term investments.

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Written by Victoria Pascoe

is an events producer and blogger for Stocks For The Week. She organizes brainstorming parties to engage and learn from Market Power Indicator users, and produces online content and videos to help beginner investors.

 
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