Stock Sectors That Go Up Usually Then Fall. Guess What Happened in 2021?

Chasing one year’s hot market sectors often means losing money in the next year.

That’s an old lesson in investing, and it has been borne out once again.

Stock sectors that were big losers in 2020 soared in 2021 to become the year’s biggest winners, while the highfliers of the previous year posted returns that ranged from mediocre to awful.

There are 11 sectors in the benchmark S&P 500 stock index: information technology, health care, financials, consumer discretionary, communication services, industrials, consumer staples, energy, utilities, real estate and materials.

They rise and fall with disturbing regularity.

The big winner in 2020 was the consumer discretionary sector, with companies like Amazon.com, Tesla, Home Depot and Nike. It returned 58 percent, including dividends, that year but only 19 percent in 2021, the third-worst of all sectors. That was well behind the nearly 29 percent return, including dividends, posted by the overall S&P 500 index. The biggest loser for 2020 was energy, with a decline of 35 percent. But it provided investors with a whopping 53 percent gain for 2021.

“Over history, there’s tremendous rotation between the best- and worst-performing sectors,” said Scott Helfstein, executive director of thematic investing at ProShares. “Trying to pick a single sector to outperform the market is like trying to hit a piñata with a broadsword after you’ve been blindfolded and spun around.”

Despite that, analysts continue to predict winning sectors for the year ahead. In December, Bank of America forecast that energy and financial stocks would outperform the market in 2022. That would require both sectors to repeat their impressive results from 2021, when energy was No. 1 and financials were third, with a 36 percent return. Bank of America and Charles Schwab both said they expected health care stocks to outperform the overall S&P 500 in 2022, after virtually matching it in 2021.

It’s easy to bet on sectors using exchange-traded funds, which mirror their performance quite closely. Some representative funds include State Street’s Energy Select Sector SPDR Fund, Vanguard Financials E.T.F. and the iShares US Real Estate E.T.F., which returned 38.7 percent.

The question for individual investors isn’t whether analyst predictions are going to be right or wrong, but whether they should consider sector investing at all.

In an economy recovering from a serious downturn or a recession, for example, one might bet that interest-rate sensitive companies such as those in the consumer discretionary sector will outperform the market, along with financial and real-estate stocks.

That trend held true after the coronavirus pandemic sent stocks plummeting in early 2020. During the three next quarters, consumer discretionary stocks led the way, showing the best performance for the year before heading down in 2021, while the real estate and financial industries followed, recovering from their respective 2020 downturns to top the market for 2021.

All that activity took place in just 20 months, which is why sector trading requires a lot of attention and a willingness to try to time the market.

That’s an approach that isn’t likely to be successful for most individual investors focused on the long-term goal of building a nest egg, noted Elisabeth Kashner, vice president and director of global fund analytics for FactSet Research Systems.

“Every time you add a market call, you’re increasing the risk that you might get it right, but you might get it really wrong, too,” Ms. Kashner said. “It makes for a bumpy ride.”

No matter what sector is rising or falling, taking a broader approach to the market allows an investor to capture those results without having to take on additional risk, said Warren McIntyre, a certified financial planner who runs VisionQuest Financial Planning in Troy, Mich.

“You’re going to get all the sectors in proportion to what they represent in the market. You’re not making a judgment call as to whether a sector is over- or undervalued,” Mr. McIntyre said.

Other drawbacks to sector-focused investing include the cost of more frequent trading, as well as taking the focus away from a longer-term strategy focused on the investor’s financial goals, said Randy Jones, a wealth management adviser with the First Financial Group in Reston, Va.

“Whether it’s one sector or another, that’s still a guess. Look at when will you need your money and find a good portfolio that has a mix of sectors that can handle any kind of change in the economy,” Mr. Jones said. “You want to make sure the money is there when you need it.”

Investors who nevertheless want to pursue a sector-based strategy will need to move away from a passive investing mind-set, warned Matthew Bartolini, head of SPDR Americas Research at State Street Global Advisors.

“This is not something you throw into your account,” Mr. Bartolini said. “You need to do ongoing monitoring because you are deviating from the traditional market-weight paradigm.” The ordinary rules of buy-and-hold investing, which enable you to put your money into broad-based funds and then walk away, will no longer hold. “You definitely don’t want to take the wrong approach of set it and forget it.”