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Back in my banking days, I had a general rule of not investing in companies within the financial sector. My reasons were twofold:
1) A simple S&P 500 index fund has plenty of financial exposure already, and
2) It seemed a bit risky to put my future income (retirement investments) in the same basket as my current income (employment).

Years have passed, and I am now in the healthcare finance biz. I've always expected, as many prognosticators do, that healthcare equipment manufacturers, pharmaceuticals, insurers, hospital management companies, etc. would benefit significantly over the next 20-30 years as the Baby Boomers begin to need more medical care. Being a mere 30 years old, I have plenty of time to take advantage of this, if it be true.

If I'm wrong, though, I could get downsized and watch my portfolio tank at the same time. What are your thoughts on investing in the sector in which you work(ed)?

--
Raven
If you know the field, you should invest there (overweight)
Invest, but no more or less than other sectors (normal weight)
A little exposure is good, but don't stake your whole future on it (underweight)
Stay out; you could lose your paycheck and your portfolio at the same time (avoid)
I have an industry sector in my pants

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....What are your thoughts on investing in the sector in which you work(ed)?....

It has been years since I have read them, but you might read some of the Peter Lynch books. As I recall this was one of his points that investing in areas that you know is the one of the few ways that the average person can find superior companies because of their "inside" knowledge. I think that he also did things like talk to his kids about what products they liked to find new ideas.

A few comments;

1) Some people chose to stick with something like 80 index funds and 20% individual stock to limit their downside if the turn out to not be good stock pickers.

2) Investing in your own company is often a bad idea for the reasons that you mentioned. Investing in other companies in that industry is a whole different situation.

3) A company can have a great product, but still be a badly managed company.

4) A great company might have a stock that is too expensive to be a good buy. Don't talk yourself into buying their stock at any price.

Greg
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>> 4) A great company might have a stock that is too expensive to be a good buy. Don't talk yourself into buying their stock at any price. <<

This bears repeating. It's possible to love the company but hate the stock (at its current valuation).

#29
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As I recall this was one of his points that investing in areas that you know is the one of the few ways that the average person can find superior companies because of their "inside" knowledge.

On the other hand, you may have to be careful about using that knowledge. We have had to sign agreements to not invest in company XYZ because of the information they will be prviding to us.

- zol
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On the other hand, you may have to be careful about using that knowledge. We have had to sign agreements to not invest in company XYZ because of the information they will be prviding to us.

I'm rarely in a position where that would be a concern, but it could happen. I've also considered looking for a well-run sector fund instead of individual stocks. But it seems like a sector, like aerospace, where the managers could really gouge their investors to pay for their "unique industry insight."

--
Raven
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My suggestion is to approach this in concrete, rather than theoretical terms. Yours is not an abstract problem.

First of all, the health care field generally is a good bet for long-term investors thanks to demographics. If you invested in a mutual fund, I don't see any particular risk you'd be taking on. If there's a recession, all sorts of stocks will get hit somewhat, but that's a short-term risk. Longer term, people get older.

The risk is in betting on a company or small number of companies. If your experience gets you excited about a particular company or companies, do some research on their stock and see if it seems like a good investment. If it all checks out (if they're not overpriced), and if you can convince yourself you're not investing on the basis of emotion, then you're probably just putting your expertise to work for you. Placing a few small bets on companies is likely to be profitable.

Investing in a combination of index funds and health-care sector funds seems like a good idea. Nice, boring long-term returns. If you see the opportunity to put 5-10% in one company that you think has a promising future, don't be afraid to do that, either.
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