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Another challenge is knowing the correct percentage of your assets to invest in a given sector. Too little and you won't adequately participate in the gain; too much and you're at risk from under-diversification. The larger problem with sector rotation is that it tends serve one goal: Beating the market. That might be fine if you've got "play money" that you don't mind losing. For most of us, investing should be a means to achieve specific long-range goals such as funding retirement or putting kids through college. "If you're too focused on sector rotation, you end up being a speculator and not an investor," says Joe Jennings, investment director for PNC Wealth Management in Baltimore. Even professional investors have a mixed record with picking the right sectors at the right time, he adds. It's not surprising. One year's top performer can be the next year's laggard; that's what happened with the utility sector between 2011 and 2012. Conversely, financials went from worst to first between 2011 and 2012. What's more, the more-frequent buying and selling required to move your money around leads to increased costs, in the form of brokerage fees as well as the capital gains taxes that accrue when you sell for a profit. Interestingly, the Standard & Poor's 500 index, which is composed of 10 sectors, has a cumulative return of 153 percent since the March 2009 market low. That's better than raw materials, utilities, telecom, consumer staples, energy, and health care, and about the same as technology, according to JP Morgan Asset Management. Only three sectors have beaten the overall market over that period by a substantial margin-financials, industrials and consumer discretionary. And that's an argument for balance and diversification.
Chasing sectors may get your adrenaline pumping, but it's incompatible with a solid, long-term plan. "It's more difficult to be disciplined," says Jennings. "You may not hit the grand slam, but you will get more consistent results."
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