Beware Of Chasing The Current Stock Market Winners

Beware Of Chasing The Current Stock Market Winners
Paul Allison, CFA

about 1 year ago1 min

Mentioned in story

A rising tide might lift all boats, but a falling one sure can sink ‘em. At least when it comes to the S&P 500, that is: the energy sector’s stayed afloat this year, but the index has been firmly anchored by other struggling ones. And it’s the difference between the top (energy, dotted red line) and bottom (communication services, orange line) sectors – an eye-popping 100% – that stands out the most. See, record profit at big oil companies has lifted the energy sector by 60% this year, while scrambling firms like Alphabet and Meta Platforms have pulled the communication services sector down 40%.

There’s a lesson in this: avoid the temptation of following the crowd, and make sure your portfolio has some diversification. Just look at the energy sector. Before 2021, it was the S&P 500’s bottom or second-to-bottom sector in six of the previous seven years. If you’d invested in energy firms then, it would’ve taken the gloss off your portfolio’s performance. And after a dismal 2020, when the sector underperformed glitzy tech stocks by around 75%, it would have been tempting to ditch energy stocks altogether in favor of the high flyers. But that would have meant missing out on some sparkling returns: ExxonMobil and Chevron Corporation – which make up close to 50% of the energy sector – are up 192% and 132% respectively over the last two years.

So as seductive as record profit and all-time-high stock prices might be today, it’s probably not the time to lump everything into energy stocks. After all, very few investors (if any) can magically flip flop between sectors. And those who try run the risk of continuously buying high, selling low, and always missing out.

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