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Should you invest in what you know?

Equity Analyst William Ryder looks at the risks and opportunities when investing in the industry you work in.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

This article is more than 6 months old

It was correct at the time of publishing. Our views and any references to tax, investment and pension rules may have changed since then.

Lots of great investors warn against buying shares in a company or industry you don’t understand.

Warren Buffett and his partner Charlie Munger famously avoided technology stocks they didn’t understand during the Dot Com Bubble. The two investors stick to what they call their circle of competence, and rarely stray outside of it.

This is an important investment principle. We shouldn’t be putting our money to work in businesses or funds we don’t understand, and instead should stick to the areas we do understand.

This article isn’t personal advice. If you’re at all unsure please seek advice. Investments rise and fall in value, so you could get back less than you invest.

Leverage your expertise

Whether you have a few years or a few decades experience, often the industry we know best is the one we work in. This can be a great way to find investment opportunities. You might have a special insight into the competitive landscape, or the most promising technological or regulatory developments.

It’s important to remember that investors can’t use material non-public information to make investment decisions – that would be insider trading. However, your experience in, and knowledge of, an industry may be used to help make more insightful decisions.

But don’t own too much

Imagine you work in construction and, based on your experience and insight, decide to invest a substantial part of your net worth in construction shares. If the industry shrinks, you risk losing both your job and a large part of your investments at the same time.

This is the argument for avoiding investments in your own industry. If your own industry suffers but your investments are in other industries, they could help offset the financial impact if you lose your job.

This is doubly true of the company you work in.

Lots of companies offer their employees attractive discounts on company shares, or pay their workers partly in stock. These schemes are designed to align the interests and incentives of employees and shareholders, especially for senior management.

The specifics of each scheme will vary, and some will be more attractive than others. Sometimes you’ll have the option to buy shares at a discount in the future. If the share price falls, you can simply take back the cash. Schemes like these can be a great low-risk opportunity. Just remember, if too much of your net worth is tied up in the same company that pays your salary, you risk losing both together.

Of course a falling share price doesn’t mean you’re going to lose your job. It’s just important to look at your overall financial picture when investing in what you know.

If you’re unsure, always ask for professional advice.

Things to keep in mind

The key is to hold a well-diversified portfolio.

Sometimes you’ll see an opportunity to invest in the industry you work in, or your company might offer an enticing way to own some of its shares. Take advantage. Just don’t let these investments become too big a part of your portfolio.

Always own a range of assets from different industries and regions that you expect to perform differently. That way you don’t risk losing too much because just one industry or company struggles.

How to build a diverse portfolio

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    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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