Pharmaceuticals: Medicine for your Portfolio?
Part of having a well-diversified portfolio is ensuring that you have some degree of exposure to all of the major economic sectors. This requires have some knowledge, no matter how minute, of all these groups and what drives their industry. One of the most profitable sectors in recent years, thanks largely in part to the creation of the Affordable Care Act (ACA), is healthcare – which encompasses everything from insurance providers to drug manufacturers.
I highly encourage exposure to this sector, however it is important to understand that risk runs amok in every sector and despite what the experts say, you should never invest in a company that you do not understand. One of the most misunderstood sectors, yet a favorite among novice investors, is in pharmaceuticals.
Within the healthcare sector, pharmaceuticals are among the most profitable but are also quite risky. “Orphan” drug companies are responsible for developing drugs to treat or cure very specific diseases, conditions, and symptoms. Often times, these stocks make incredibly wild swings up and down whenever news breaks regarding production approval or denial from federal or international drug agencies, or based on the success of clinical trials. If you time it right, you can make a lot of money on these stocks, but the odds of timing it just right without any inside information (which is not legal to act upon) is extremely slim. The only way I would suggest investing in these is if you, or someone close you to, is actually considering using the drug and is thereby creating a market for the company.
These companies also give the illusion that they are “cheap” since many of the stocks have prices below $10 per share. Just bear in mind that even small changes in the price can mean large gains or losses for you. Careful analysis and understand of these stocks is the only way an individual investor can comfortably invest in pharmaceuticals over the long-term. Otherwise, make sure you consult a stock professional who specializes in this sector. You can also read plenty of free research online, but make sure you pay attention to their credentials.
Below is a chart for the Health Care Select Sector SPDR ETF (XLV) over the past five years, and despite several major market hits, the returns have been quite impressive.
Pharmaceuticals may be the medicine for growth that your portfolio is looking for, but ensure minimal risk by checking out the most diversified drug companies first, namely Pfizer, Astrazeneca, Novo Nordisk, Merck, Bristol-Myers Squibb, Glaxo Smith Kline, or Johnson & Johnson.
Be well during cold season all!