Topic: How To Invest

Sector rotation: Eventually, you guess wrong

We advise against a so-called “sector rotation” approach to investing; this is when you try to hop from sector to sector. We also advise against practicing a top-down sector rotation style; underweighting or overweighting sectors of the stock market depending on a forecast of the stage of the economic cycle, or other factors.

Few sector rotation strategies succeed over long periods, because they need to guess right twice. In other words, they have to pick the top sectors, and they need to pick the stocks to rise within those sectors. Consistently succeeding at both is extremely difficult.

There are many theories about which sectors will outperform at any given stage of the economic cycle. But trying to pick winning sectors — and staying out of other sectors — seldom works over long periods. Practitioners of sector rotation often wind up with heavy holdings in the worst-performing sectors. This can be devastating to your portfolio, even if you confine your investments to well-established companies.


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Rather than using sector rotation to try to beat the market, you should pick a good selection of stocks right from the outset. After you’ve decided what part of your savings to put in stocks, remember to spread it out across the five main economic sectors. This way, you avoid overloading yourself with stocks that are about to slump simply because of industry conditions or changes in investor opinion.

By diversifying across the sectors, you also increase your chances of stumbling upon a market superstar — a stock that does two to three (or more) times better than the market average. These stocks come along every year. By nature, their appearance is unpredictable; if you could routinely spot them ahead of time, you’d quickly acquire a large proportion of all the money in the world, and, as we mentioned earlier, nobody ever does that.

Speaking very generally, stocks in the resources & commodities sector and the manufacturing & industry sectors are apt to expose you to above-average volatility, while those in the finance and utilities sectors involve below-average volatility. Shares of many finance-sector firms have been unusually volatile in the past few years because their industry is changing and expanding. However, company profits in finance and utilities tend to be more stable over the long term than the profits of resources or manufacturing companies. Consumer-sector stocks are apt to fall in the middle, between the highly volatile resources and manufacturing companies and the more stable finance and utilities companies.

Rather than practicing a sector rotation strategy, most investors should have investments in most, if not all, of these five sectors. The proper proportions for you depend on your temperament and circumstances.

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