Pros and Cons of Sector Rotation Investing

Sector rotation investing is an investment strategy that involves moving investment money from one sector of the market to another. For example, an investor could move money from the transportation sector to the health care sector, and then to the financial sector. The hope is to move the money before the sectors decline in value and the other sectors increase in value. Here are a few of the pros and cons of using sector rotation investing.

Pros

The big advantage with sector rotation investing is that you can move from a sector that is underperforming and earn better returns. The theory behind this investment strategy says that sectors of the market tend to move in a cyclical nature. When one sector increases invaluable, another sector will generally be decreasing. If you can accurately predict what will happen with the sectors, you can make substantial profits.

Another advantage of this strategy is that you will not have to ride out a downtrend. With many investment strategies, you have to hold onto your stock even if the prices of it continue to go down. With sector rotation, you will be leaving the sectors that are performing poorly and moving your assets to different sectors. The hope is that you can time it just right so that you can get out while there is still some value in your stock and purchase stock in the other sector at a discount.

Cons

Even though sector rotation investing has some solid logic behind it, there are a few problems when you go to actually put it into practice. One of the biggest problems is that in order for this strategy to be successful, you will have to successfully time the market. Many experts have documented the difficulty that people have in successfully timing the market repeatedly. If you can do it a few times successfully, you are generally ahead of the curve. After that, you will be lucky to continue this string of winning.

The big problem with this strategy is that you really do not know which sectors are going to increase in value and which ones are going to decline. In some cases, you may be able to get a general feel for what will happen with a sector in the future. However, timing it properly can be very difficult. You might get out of a stock way too early before it peaks and then overpay for stock in another sector.

Another problem with sector rotation investing is that the average person is not qualified to choose the right sectors. In order to have your best shot at being successful with this strategy, you may need to invest in an ETF, or a mutual fund, that practices sector rotation. You will be required to pay for management fees of the fund which can cut into your returns overall. 

When you are consistently involved in sector rotation, you will also have to consider transaction costs. When you are selling all of your stock in one sector at the same time and then buying stock from another sector, you will have to pay commissions on these transactions.

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