Why You Should Invest In More Than One Sector

Imagine knowing in advance both major challenges in stock picking: which stock or sector will outperform all others, and when that outperformance will occur. Unfortunately, an overwhelming body of evidence shows that no one can consistently and accurately predict price changes. However, it doesn’t take a Warren Buffett to acknowledge that financial headlines over the past couple of years have centered around technology; more specifically, Artificial Intelligence and all its accompanying branches of business, including large data centers.

 If, at the end of 2022, you had known that “Communication Services” would rank 2nd among reported sectors in 2023 and rank 1st in 2024 and 2025, the potential to earn excessive returns would have been available. Hindsight is great for “if only” scenarios, but it's usually not compelling enough in real time to justify overloading an investment portfolio with a single sector given the increased risk.  In addition, most of our lives have been shaped and will continue to change with advanced technology, particularly AI. So it is not illogical for anyone to believe that technology-related sectors will outperform other sectors.

  Sectors represent groups of companies that make similar products or offer comparable services. Recent history shows how challenging it is to choose ‘hot’ sectors in advance. The colorful chart below shows the various economic sectors and their annual performance rankings from 2016 to 2025. Once you get past the initial confusion of the color palette, the chart reveals some of the following highlights:

·      From 2016 to 2025, no sector was a consistent outperformer (notwithstanding the last two years).

·         Energy, the best performer in 2016, 2021, and 2022, delivered the worst annual returns four times.

·         Healthcare finished last in 2016, first in 2018, and next-to-last in 2019.

·         Financials never reached higher than the top three but only once fell below the bottom four.

The solution to capturing the annual returns of the top-performing sectors is to own parts of most, if not all, sectors. Diversification among Mutual Funds or ETFs allows you to always invest in the top-performing industries or asset classes.

Investing is about risk and return. Investors receive compensation for the risk they accept. Overwhelming evidence suggests that equity performance is determined by allocation to small or large companies (size factor) and to value or growth companies (value factor). Most people would think the potential earnings from the technology or financial sector would be greater, for example, than the Utility or Consumer Staples sector – and they’re probably right. But the market consensus probably expects the same thing. One of the central tenets of the Efficient Market Theory is that the current price of a stock has already “factored in all knowledge and expectations for that stock. The evidence shows that above-average expected earnings for a company do not automatically suggest its investment performance will also be above average – it depends on what the market was expecting.

At Carr Wealth Management, we apply straightforward, common-sense investment principles. An advisor’s expertise is measured not only by helping clients make the right decisions but also by helping them avoid the wrong ones!

Please contact us by email or phone (925) 484-1671 to schedule a no-charge consultation or if you have any questions about our services.