Sector Rotation begins with a macro-economic view of the world. As economies cycle, different sectors of those economies have distinct advantages, while others move from favor to disadvantage. Fortunately, these usually last for one to five years, so it is not a discipline which requires unusual amounts of trading.

One example is during a time of rising interest rates. It is obvious even to the casual observer when the Federal Reserve is raising or lowering rates. The “Fed” seldom, if ever, bounces back and forth between the two. They tend to do one for a period of months or years, then hold steady, followed by another period of raising or lowering. If rates are rising, it will generally hurt stocks of homebuilders and banks, and will lower the value of bonds. It is more expensive to buy a home if mortgage rates are 10% than if they are 6%, so homebuilders will likely sell far fewer homes when rates rise. By the same token, banks will make fewer loans and the older loans, made at lower rates, become less profitable due to the higher costs of money. Bonds suffer a similar fate.

There are many other examples of cycling economies which would dictate that a wise investor allocate more investment to some sectors and less to others, rather than always allocating pre-defined percentages to all sectors, at all times, regardless of economic conditions (the typical pie chart allocation). Sector Rotation, instead, allows for a diversified portfolio which simply eliminates the sectors and economies which are currently at the highest statistical risk of decline, while focusing on those sectors with the highest probability of gain.

You would hear more about this (logical) method of diversification, but it simply does not fit well with large mutual fund companies and large broker dealers. Mutual fund companies do not want their customers moving money from one fund to another – it is too costly and creates an amount of havoc. The large brokers simply manage too much money to offer such a service.

Though history* and many studies show Sector Rotation to be “the best” method of managing money, it can only be done by those who have the necessary knowledge and skill set, and invest manageable amounts of money. This and true independence are two major reasons Beck Capital Management LLC and Pro-Player Investing were formed.

* Past performance is no guarantee of future results.