There is no real way to guarantee returns that exceed the average of the stock market, but you can consider investing in sectors that have historically performed well. The best sector funds for long-term investment may be those that invest in technology, healthcare, and discretionary consumer sectors.
Investing in Sector Funds
You may hear about investors or traders or fund managers trying to “beat the market.” This term means they are looking for returns that outperform a broad market index, such as the S&P 500. As an investor, you want to achieve the highest possible returns with the least amount of risk. To do this, you would need returns that are higher than the S&P 500 or Dow Jones Industrial Average. One way is to invest in market sectors that have historically outperformed the indices. Sector funds are often among the best funds to invest in areas with higher returns.
Healthcare Sector
With an aging population and rapid advancements in biotechnology, the healthcare industry is an attractive option. This sector is considered one of the top three growth sectors between 2012 and 2022, and there is a good chance that healthcare will continue to evolve in the future.
The healthcare sector is considered a “defensive” sector, meaning it is not affected as much as other sectors during economic downturns. The healthcare sector includes a wide range of businesses, including hospital companies and institutional services. Other companies in the industry include insurance companies, pharmaceutical manufacturers, biotech firms, and medical device manufacturers.
Technology Sector
The technology sector is at the forefront of innovation. It is also the driver of the information and data explosion we have seen since the beginning of the 21st century.
Technology has shaped the economy for decades, and although it experienced slower growth in 2022, the sector still performed well over the timeframe from 2012 to 2022. During that period, it saw growth of over 366%. There is no guarantee that this performance will continue, but technology is always changing, so there is a chance for continued positive returns in the long term.
Discretionary Consumer Sector
The discretionary consumer sector includes companies that provide products and services considered more luxurious or enjoyable. It is also known as “cyclical consumer stocks,” where the demand for products and services in this sector tends to be higher during certain periods of the business cycle, such as the growth phase.
Consumers tend to demand products and services when they have more money and feel optimistic about their jobs and financial situations. When the economy contracts, the demand for these stocks also decreases. Examples of discretionary consumer stocks include Apple (AAPL), Disney (DIS), and Starbucks (SBUX).
Conclusion
Past returns do not guarantee future results. If you want to consider sectors that have performed well in more recent history, such as the period between 2019 and 2022, you may choose to invest in sectors like energy and utilities or consumer staples.
However, considering the longer history may also be beneficial when choosing investments. There is no guarantee of seeing the same type of growth and performance in the healthcare or technology sectors, but people will always need healthcare, and technology continues to change.
Before buying sector funds, you should keep in mind that putting a large amount of capital into a single sector can increase your portfolio risk. You also should not try to time the market in the short term. It is wise to diversify your investments and portfolio and consider a variety of sectors, stocks, and funds.
Questions
Frequently Asked Questions (FAQs)
When is the best time to invest in defense sectors if you are using sector rotation?
The defense sectors aim to prevent significant losses during an economic downturn, so the best time to invest in the sector is when the business cycle is at its peak. In fact, recognizing the peak while it is happening is very difficult, but if you can move into the defense sectors before or at the peak of the business cycle, you may be able to protect yourself from some losses.
How many sectors are there in the stock market?
Global industry classification standards recognize 11 sectors. These are: energy, materials, industrials, consumer discretionary, consumer staples, healthcare, financials, information technology, telecommunications services, utilities, and real estate.
How can you identify the top-performing sectors?
Identifying top-performing sectors is similar to identifying top-performing stocks. Technical analysis and charts can help you identify sectors that are experiencing an upward trend. One of the easiest ways to analyze sector performance is to look at the charts of the corresponding ETF funds. For example, XLV tracks the healthcare sector, and technical analysis of XLV’s price movements can give you insight into the healthcare sector as a whole.
The Balance does not provide tax, investment, financial, or any advice. The information is presented without regard to the investment objectives, risk tolerance, or financial circumstances of any specific investor and may not be suitable for all investors. Past performance is not indicative of future results. Investing involves risks, including the risk of losing principal.
Sources
Fidelity. “Sectors & Industries – Performance.”
MSCI. “The Global Industry Classification Standard (GICS).”
Source: https://www.thebalancemoney.com/best-sectors-to-invest-for-the-long-term-2466351
Leave a Reply