For stocks, past performance isn’t always a good indicator of future results. Sometimes, yesterday’s losers can be tomorrow’s winners…
In May, I told you about the idea of beating the market by buying the most-hated stocks. If you had bought 10 of Asia’s (excluding Japan) most-hated stocks one year ago, you’d be up double digits on seven of them… and triple digits on one. Overall, the average return on these hated stocks was better than the market return.
Why does this happen? As we’ve written before, mean reversion is a powerful force… and so are contrarian investors looking for the next out-of-favour asset that’s going to play “catch up” with everything else.
So with U.S. stock indices and the MSCI All-Country World Index hitting all-time highs, a smart investor looks beyond the headlines to markets and sectors that are trailing.
Which sectors have underperformed?
As I said earlier, the MSCI All-Country World Index has been on a tear… it’s up 237 percent from its 2009 lows (in U.S. dollar terms) during the global financial crisis.
But this performance masks wide variance between sectors.
The graph below shows how individual global sectors have performed since the market lows of March 2009.
As you can see, the technology, consumer discretionary (things like entertainment and leisure) and financials (including banks and insurance companies) have performed the best. They’re all up around 300 percent or more.
The worst-performing sectors have been energy, utilities and materials (metals, chemicals and so on). The energy sector is up a relatively measly 65 percent since 2009.
The numbers for some sectors get even worse if you look back at their performance from their highs in October 2007 – just before markets crashed in the global financial crisis.
As you can see, materials are still down 11 percent and energy is still down 19 percent from their 2007 highs.
That means, on average, an investor who put money into a diversified fund in these sectors is likely still underwater – nearly ten years later. Yikes.
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Will these sectors play “catch up”?
Investors looking to bet on a rebound in the energy sector could buy the iShares Global Energy ETF (New York Stock Exchange; ticker: IXC) or the db x-trackers MSCI World Energy ETF (London Stock Exchange; ticker: XSW0).
And if you think materials are due for a recovery, you might consider the iShares U.S. Global Materials ETF (New York Stock Exchange; ticker: MXI) or the SPDR MSCI World Materials UCITS ETF (London Stock Exchange; ticker: WMAT).
But keep in mind: there’s no guarantee that these sectors are going to perform better in the future.
These sectors have underperformed over the past several years. You could have bet on them catching-up with the rest of the market at any point… and you would have been wrong.
“Timing” the market will hurt your performance
Besides backing the wrong sector that you think is “due to catch up,” the easiest way to lose out on investment gains is by simply not being invested.
For an example of just how important it is to avoid trying to time the market, let’s look at the MSCI All-Country World Index.
Since March 2009, there have been 436 trading weeks of the MSCI All-Country World Index. If you had been invested in the index during this time, you’d be up 240 percent, for an average annual return of 15.7 percent.
But someone who was invested in the index during all of these weeks except the single best-performing week (the week of March 13, 2009) would be up just 213 percent.
And if you happened to be out of the market during the five best-performing weeks? You’d only be up 140 percent, for an average annual return of 11.1 percent. If you missed out on the best-performing 10 weeks? You’d be up just 87 percent, or an annual average return of 8 percent – about half of the total period return. That’s a good return – but it’s half of what you’d have earned if you hadn’t missed those crucial weeks.
This is because, by missing out on just a few weeks of great performance, you didn’t just miss out on the returns of those great weeks…
Your portfolio missed out on the magic of compounding. (You can read more about compounding here.) The return you didn’t earn in those weeks was not available to earn you an additional return in the following weeks and years – because you didn’t make anything in those critical weeks.
In short, buying the underperforming sectors is no guarantee for big returns… but if you’re going to speculate, don’t get fancy and try to time the market. Yes, you may avoid the brunt of a big correction and come out ahead. But those missed weeks of outstanding performance can hurt your portfolio for years and years.
Publisher, Stansberry Churchouse Research