Some investors follow a “sector rotation” approach to investing. That’s when you try to hop from sector to sector, underweighting or overweighting your holdings in certain sectors of the stock market depending on a forecast of the stage of the economic cycle, or other factors. This approach can work in any one year, say. However, it’s difficult if not impossible to produce consistent longer-term returns. Here are two reasons why:
- You need to guess right three times to profit in sector rotation: You have to pick the top sectors, then pick the stocks that will rise within those sectors, then sell before the sector stumbles. It’s virtually impossible to consistently succeed at all three over long periods. But that’s not the only problem with sector rotation.
- Sector rotation can overweight you in the worst-performing sectors: 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. Investors who attempt to do so often wind up with heavy holdings in the worst-performing sectors. That would be devastating to your portfolio, even if you confine your investments to well-established companies.
[ofie_ad] Rather than using sector rotation to try to beat the market, we recommend that you pick a balanced selection of high-quality stocks right from the outset, making sure to spread your holdings out across the five main economic sectors (Resources & Commodities, Finance, Manufacturing & Industry, Utilities and Consumer). Unlike sector rotation, this approach helps you avoid overloading yourself with stocks that are about to slump because of industry conditions or changes in investor fashion. 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. For the part of your portfolio you devote to aggressive investing, you could choose from the 84 stocks we cover in our Stock Pickers Digest newsletter. Every month, you get a full listing of all of these stocks clearly labelled by industry sector. Plus, each stock displays our buy/sell/hold advice so you can see at a glance which of these companies would make the best additions to your aggressive holdings. You always get our very latest aggressive picks, including our in-depth analysis of each company, when you subscribe to Stock Pickers Digest. Best of all, you can get one month free when you subscribe now. Click here to learn how.
