Equity sectors that usually rise will fall. Guess what happened in 2021?

Hunting the hot market sectors one year often means losing money the next.

That’s an old lesson in investing, and it’s been confirmed once again.

Equity sectors that were big losers in 2020 rocketed in 2021 to become the biggest winners of the year, while the previous year’s high-flyers posted returns that ranged from mediocre to dire.

There are 11 sectors in the S&P 500 stock index: information technology, healthcare, financials, consumer discretionary, communications services, industrials and services, consumer discretionary, energy, utilities, real estate and materials.

They rise and fall with alarming regularity.

The big winner in 2020 was the consumer discretionary sector, with companies such as Amazon.com, Tesla, Home Depot and Nike. It returned 58 percent that year, including dividends, but only 19 percent in 2021, the third-worst of any industry. That was well below the nearly 29 percent return, including dividends, recorded by the overall S&P 500 index. The biggest loser for 2020 was energy, with a decline of 35 percent. But it gave investors a whopping 53 percent gain for 2021.

“Throughout history, there has been a massive 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 spun.”

Despite this, analysts continue to forecast winning sectors for the year ahead. In December, Bank of America forecast that energy and financial stocks would outperform the market in 2022. That would mean both sectors would have to repeat their impressive results from 2021, when energy was number 1 and financials third, with returns of 36 percent. Bank of America and Charles Schwab both said they expected healthcare stocks to outperform the overall S&P 500 in 2022, after nearly matching it in 2021.

It’s easy to bet on sectors that use exchange-traded funds, which reflect their performance quite well. Some representative funds include State Street’s Energy Select Sector SPDR Fund, Vanguard Financials ETF and the iShares US Real Estate ETF, which returned 38.7 percent.

The question for individual investors is not whether analysts’ forecasts will be right or wrong, but whether they should consider sector investments at all.

For example, in an economy recovering from a severe downturn or recession, one could bet that interest rate sensitive companies, such as those in the consumer durables sector, will outperform the market, along with financial and real estate stocks.

That trend persisted after the coronavirus pandemic caused stocks to plummet in early 2020. Over the next three quarters, consumer discretionary stocks led the way, with the best performance of the year before falling in 2021, while the real estate and financial sectors followed, recovering from their respective recessions in 2020 to outperform the market for 2021.

All that activity happened in just 20 months, so sector trading requires a lot of focus and a willingness to try and time the market.

That’s an approach that is unlikely to be successful for most individual investors focused on the long-term goal of building a nest, noted Elisabeth Kashner, vice president and director of global fund analytics for FactSet Research Systems.

“Every time you add a market call, you increase the risk of doing it right, but you can also do it really wrong,” Ms Kashner said. “It makes for a bumpy ride.”

Regardless of which industry is rising or falling, taking a broader approach to the market allows an investor to capture those results without taking on additional risk, said Warren McIntyre, a certified financial planner who leads VisionQuest Financial Planning in Troy, Michigan.

“You get all sectors in proportion to what they represent in the market. You don’t judge whether an industry is overvalued or undervalued,” said Mr. McIntyre.

Other drawbacks of sector-focused investing include the cost of more frequent trading and the taking away from the focus of a long-term strategy focused on the investor’s financial goals, said Randy Jones, a wealth management consultant with the First Financial Group in Reston, Va.

“Whether it’s one sector or the other, that remains a mystery. Look at when you need your money and find a good portfolio with a mix of sectors that can handle any kind of change in the economy,” said Mr Jones. “You want to make sure the money is there when you need it.”

Investors who nevertheless want to pursue an industry-oriented strategy will need to move away from a passive investment mindset, warned Matthew Bartolini, head of SPDR Americas Research at State Street Global Advisors.

“This is not something you throw into your account,” said Mr. Bartolini. “You have to constantly monitor because you’re deviating from the traditional paradigm of market weight.” The ordinary rules of buy-and-hold investing, which allow you to put your money in broad-based funds and then walk away, will no longer apply. “You definitely don’t want to take the wrong approach to set it up and forget about it.”


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