This piece was written a few years ago, as notes from my introduction to investment. After getting a preliminary understanding of basic financial product concepts, I began reading several recommended investment-related books. Reading these books was challenging, and progress was slow. Meanwhile, I also opened several brokerage accounts to learn by practicing. For beginners like me, gaining some basic knowledge and then getting hands-on can lead to a quick entry into the world of investment.

I stumbled upon a YouTuber whose content was very informative, sharing investment knowledge, methods, and promoting a healthy investment mindset. I greatly benefited from watching his videos. He summarized the knowledge of listed company categorization, which is very suitable for beginners. Below is a mind map summarizing the video: Summary of Listed Company Categorization.

Why understanding listed company categorization is important? Imagine yourself as an investment novice trying to pick stocks to invest in. Without background knowledge, we tend to choose using three “methods”:

1. Picking stocks that currently seem to be performing well based on their charts.
2. Selecting stocks that everyone is raving about.
3. Paying attention to what successful investors are investing in.

These three methods can directly correspond to three biases in behavioral finance: recency bias, bandwagon effect, and availability bias.

• Recency bias: People tend to believe that future events will be highly similar to recent experiences when assessing the trend of things.
• Bandwagon effect: When individuals are influenced by a group (guided or pressured), they doubt and change their own viewpoints, judgments, and behaviors, moving in the direction consistent with the majority of the group.
• Availability bias: This refers to the tendency of people to rely on readily available information when making decisions. Investors may focus too much on information they know or can easily access and neglect other information, resulting in biased judgments.

The right investment attitude should be - I need to know how to evaluate the risk and return of the investment product I choose, and make investment decisions through my own analysis. Understanding stock categorization is the first step, allowing you to roughly assess the risk and return of stocks.

S&P 500 Sector Index

Applying the knowledge of listed company categorization to the performance of the S&P 500 sector index over the past fourteen years, several conclusions can be drawn:

• During the financial crisis, the four industries with the smallest fluctuations were all defensive, consistent with the nature of the industries.
• Information technology and energy sectors had the highest volatility, consistent with the characteristics of sensitive industries.
• Since the beginning of the pandemic, the impact on the economy has been reflected in the poor performance of cyclical industries such as finance and real estate.

The Robo-Advisor ETF Portfolio I’m Currently Investing In

After understanding listed company categorization, I found that I could completely understand this asset allocation and how “diversified investment” operates within it. This Robo-advisor portfolio is concentrated in large-cap stocks in the information technology and consumer services sectors, combining income and growth. Growth ensures a certain rate of return under risk, while income, and the selection of large-cap stocks, ensures stability.

If I didn’t have this basic understanding, I might not even know what I’m buying and wouldn’t be able to determine the reasons for high or low returns. For beginners, I think a robo-advisor portfolio is a good way to start. After gaining experience, you can decide whether you want to DIY your asset allocation depending on your interests, motivation, and time.

Appendix:

• S&P 500 Sector Performance