Will Picking Today's Hot Sector Drive Long-Term Gains?

Will Picking Today's Hot Sector Drive Long-Term Gains?

No one sector leads the market year after year. So how can your manager help create a portfolio that has the potential to perform well regardless of sector rotation and minimize market volatility?

Published by Motley Fool Wealth Management Originally posted on Wed, May 18, 2022 Last updated on May 18, 2023

read time 4 min read

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Sports betting has gone mainstream. But that doesn’t mean it’s easy. While some people may, on occasion, win a single game, when they parlay several games, the odds of winning are reduced exponentially.

Stock selection is similarly as hard. While an investor may get one or a few stocks right, selecting a portfolio of winners is not as easy.

That’s because market leadership is not static.

Just look at the chart below. We know, there are a lot of colors! But as they say, a picture tells a thousand words.

In order of best to worst performing, this chart ranks all of the market sectors represented in the S&P 500 compared to the S&P 500 index itself, for the last 15 years through December 31, 2022.

SectorPerformance-2023Source: novelinvestor.com. Past performance does not guarantee future returns. The historical performance is meant to show changes in market trends across the different S&P 500 sectors over the past ten years. Returns represent total annual returns (reinvestment of all distributions) and does not include fees and expenses. The investments you choose should reflect your financial goals and risk tolerance. For assistance, talk to a financial professional. All data are as of 12/31/22.

No, your eyes are not deceiving you! Sector winners are all over the map. For example, in 2018, healthcare was the top dog, but then in 2019, it was trolling near the bottom of the chart. Energy was the winner last year, and the year before, but it was the biggest loser according to this chart for the past three years from 2018 to 2020. The takeaway? There’s no discernable pattern.

So while the chart makes a lovely colorful quilt, it doesn’t exactly inspire confidence that picking the right sector will help drive long-term portfolio growth and minimize volatility.

But how can your investment manager help to create a portfolio that has the potential to perform well while considering sector rotation and market volatility?

Bottom-up fundamental analysis can be key.

Unlike sports betting, which has many uncontrollables, finding what we believe is a Quality company is about doing your homework. Our team has developed a repeatable investment process that analyzes and scores companies using our Four Pillars of Quality framework:

  • Management, culture, and incentives
  • Economics
  • Competitive advantages
  • Trajectory

That doesn’t mean that we get every security selection right—no one does. But it does mean that we pick our investments based on individual company dynamics and their interplay with consumers, competitors, and the overall economy.

So even if overall sector returns are all over the map—as they tend to be—it often doesn’t matter to us because we strive to construct our portfolios with Quality companies and volatility minimization in mind, regardless of in which sector they may fall.

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