Pursuing hot market sectors one year often means losing money the next.
It’s an old lesson in investing, and it’s been confirmed once again.
Stock sectors who were big losers in 2020 soared in 2021 to become the biggest gainers of the year, while the biggest from the previous year posted mediocre to awful returns.
The benchmark S&P 500 stock index includes 11 sectors: information technology, healthcare, financials, consumer discretionary, communication services, industrials, consumer staples, energy, utilities, real estate and materials.
They rise and fall with disturbing regularity.
The big winner in 2020 was the consumer discretionary sector, with companies like Amazon.com, Tesla, Home Depot and Nike. It returned 58% including dividends that year, but just 19% in 2021, the third worst of any industry. That was well below the nearly 29% return, including dividends, posted by the overall S&P 500 index. The biggest loser for 2020 was energy, down 35%. But it provided investors with a whopping 53% gain for 2021.
“As history goes, there’s been a huge rotation between the best and worst performing sectors,” said Scott Helfstein, executive director of thematic investing at ProShares. “Trying to pick a single sector to outperform the market is like trying to hit a piñata with a broadsword after being blindfolded and turning around.”
Despite this, analysts continue to predict the winning sectors for the year ahead. In December, Bank of America provide that energy and financial stocks would outperform the market in 2022. This would force both sectors to repeat their impressive results from 2021, when energy was No. 1 and financials were third, returning 36%. Bank of America and Charles Schwab both said they expect health care stocks to outperform the broader S&P 500 in 2022, after nearly matching it in 2021.
It is easy to bet on sectors using exchange-traded funds, which fairly accurately reflect their performance. Some representative funds include State Street’s Energy Select Sector SPDR fund, the Vanguard Financials ETF and the iShares U.S. Real Estate ETF., which returned 38.7%.
The question for individual investors is not whether analysts’ predictions will be right or wrong, but whether they should consider investing in the sector.
In an economy recovering from a severe downturn or recession, for example, one could bet that interest rate-sensitive companies such as those in the consumer discretionary sector will outperform the market, as well as financial stocks and real estate.
This trend was confirmed after the coronavirus pandemic caused equities to tumble in early 2020. Over the next three quarters, consumer discretionary stocks led the way, posting the best performers of the year before falling in 2021, while the real estate and financial sectors followed, recovering from their respective 2020 downturns to dominate the market in 2021.
All of this activity happened in just 20 months, which is why sector trading requires a lot of focus and a willingness to try and time the market.
It’s an approach that’s unlikely to be successful for most individual investors focused on the long-term goal of building a nest egg, noted Elisabeth Kashner, vice president and head of global fund analytics for FactSet Research Systems.
“Every time you add a call to the market, you increase the risk of getting it right, but you can also get it really wrong,” Kashner said. “It’s been a bumpy ride.”
No matter which sector is up or down, taking a broader view of the market allows an investor to capture those results without having to take on additional risk, said Warren McIntyre, a certified financial planner who runs VisionQuest Financial Planning in Troy. , Michigan.
“You’re going to get all the sectors in proportion to what they represent in the market. You don’t judge whether a sector is overvalued or undervalued,” McIntyre said.
Other downsides to sector-focused investing include the cost of more frequent trading, as well as distracting attention from a longer-term strategy focused on the investor’s financial goals, Randy said. Jones, wealth management adviser at First Financial Group in Reston. , Goes.
“Whether it’s one sector or another is still a guess. Look at when will you need your money and find a good portfolio that has a mix of sectors that can handle any type of change in the economy,” Jones said. “You want to make sure the money is there when you need it.”
Investors who nonetheless wish to pursue a sector strategy will need to move away from a passive investing mindset, warned Matthew Bartolini, head of SPDR Americas Research at State Street Global Advisors.
“It’s not something you throw in your account,” Mr. Bartolini said. “You need to do continuous monitoring because you’re moving away from the traditional market weight paradigm.” The ordinary rules of long-term investing, which allow you to put your money into diversified funds and then withdraw, will no longer apply. “You definitely don’t want to take the wrong approach of set it and forget it.”