SECTOR TIMING
POWERFUL DETERMINANTS OF THE VALUE OF SPECIFIC STOCKS AND BONDS: SECTOR ROTATION AND MARKET TIMING
How to deal strategically with the variations of the markets today? There are effective determinants suggested by some analysts in order to fight the changes of the competitive market. A thorough and vivid analysis is vital for victory and, as the word stresses, rotating investments from sector to sector is a continuing process that assumes continuous active portfolio management, rather than merely tuning the portfolio annually and this is to be done with the approach called Sector Rotation.
Sector rotation demands ruthless discipline being part of the
sector timing approach. It has been defined as buying specific stocks and bonds in one or more of these sectors, then, anticipating a fall, moving the funds into stocks and bonds in other sectors. It is an approach to monitoring the financial markets in order to anticipate economic recovery and contraction in different sectors of the economy. Upon this monitoring, investments are made in individual companies and in different sectors of the economy with funds rotated through value and growth — small, mid-range and large cap — stocks, and bonds.
Sector timing talks about strategic distinctions. What is the distinction of "sector rotation" from the "market timing" investment approach?
The sector rotation approach is based upon shrinking exposure and increasing concentration in different asset classes based upon political and economic events, in addition to interest rate changes and many other factors. The potential difficulty in practicing sector rotation stems from the inability to predict the length of time expansion will take place in a given sector. Contrary with the market timing approach which is based solely upon interest rate increases and reductions and the movement of funds closely follows this economic indicator.
In order to mitigate the risk and to create more stable rates of return, a well managed
sector timing rotating investment between sectors can be a very operative methodology. It also contrasts vividly and amplifies the dangers of two other investment strategies: indexing a portfolio to a specific investment index, such as Standard and Poor's, and passively investing in a stock for the long term with little active management.
In the right circumstances, with sound management, buy and hold strategies can be very effective, however the sector rotation approach adheres to the old adage: never grow too personally attached to a stock!
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