Widely read:
Everyone knows the difference between a sprint and a marathon. Marathons are about discipline, but sprints are run on pure adrenaline. And who doesn't like a bit of a rush?
No wonder, the markets are full of investors chasing the rush of instant gratification. And to ensure instant gratification comes soon enough, many of us keep moving our money from one red-hot sector to the other.
But does this sector rotation strategy help in bulging your pockets? We decided to channel our inner geek by conducting a study to see if the strategy really works.
What did we study
We looked at the performance of 10 sectors, namely, Auto, FMCG, IT, Media, Metal, Pharma, Private Banks, PSU Banks, Realty and Oil & Gas, over the last 15 years.
We observed how a sector rotation strategy would perform if you put your money equally in the best five sectors of the previous year at the start of each year. We repeated this process for five years.
For a head-on comparison, we studied how your wealth would perform if you invested in a diversified manner through an average flexi-cap fund .
What did we find?
- Chasing the five best-performing sectors from the previous year doesn't work.
- As shown in the graph, a diversified portfolio performs better on most occasions.
- Chasing the hottest sectors is damaging. In fact, an underperformance of more than 5 per cent over a five-year period can cause you significant loss in the long run.
| Chasing red-hot sectors | Staying disciplined |
|---|---|
| You invested Rs 10 lakh | You invested Rs 10 lakh |
| You shift your money to the best-performing sectors of the previous 12 months each year | You put your money in an average flexi-cap fund. Flexi-cap fund invests in companies of all sizes. |
| Assuming your investment grows at 12 per cent p.a, it would be Rs 17.6 lakh after five years | Assuming your investment also grows at 12 per cent, it would be Rs 21.9 lakh after five years! |
The reward for discipline is Rs 4.3 lakh in five years!
Moral of the story
Chasing red-hot sectors can burn your fingers. Instead, have a diversified portfolio and stay patient. Only when you delay instant gratification can you earn long-term satisfaction.
This article was originally published on August 10, 2023.
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