If the seesaw market of the past 10 years has taught investors anything, it's to not get too comfortable.
As an investor, it's incredibly hard not to get trapped in the rut of the familiar. We all tend to invest in what we know, to try to stay in our comfort zones by putting our money into the comfortable.
But over the past decade and more, investing in the same stocks from one bull market cycle to the next hasn't been the way to score the biggest returns.
During this period, not only has the stock market been extraordinarily volatile, but the leadership in each bull market rally has been radically different from the leadership in the previous rally.
Today's topic is how to bust your investment thinking out of any ruts. And I'll be adding some of those rut-busters to my watch list with this column.
Spinning the sector bottle
As I noted, a different group of stocks has starred in each bull market cycle of the past decade-plus.In the bull market that ended in 2000, technology stocks led the way. The Technology Select Sector SPDR (XLK, news, msgs), an exchange-traded fund, was up 65% in 1999, for example.
But in the next bull market, technology stocks stunk; you would have done much better with energy shares. In 2005, for example, right in the middle of the bull cycle, the Technology Select SPDR returned 0.18% for the year. That same year, the Energy Select Sector SPDR (XLE, news, msgs) returned 40%.
In 2009, you would have done fine with the Financial Select Sector SPDR (XLF, news, msgs), with an 18% return for the year, or the Energy Select SPDR, with a 22% return. But the big momentum had swung back to the Technology Select SPDR, with a 51% return, and to the Materials Select Sector SPDR (XLB, news, msgs), with a 48% return. (What's in the Materials Select SPDR? Stocks such as DuPont (DD, news, msgs), Monsanto (MON, news, msgs), Freeport-McMoRan Copper & Gold (FCX, news, msgs) and Nucor (NUE, news, msgs).)
And for the next bull?
In my June 8 column, I gave you my top-down macro-view of where you'll want to put your money. My recommendation was to overweight emerging-market stocks, commodity stocks and financial stocks.
But this kind of top-down thinking still leaves you vulnerable to getting caught in a rut when it comes to picking individual stocks in those sectors:
- Do you want to own BHP Billiton (BHP, news, msgs) in the next rally because it's familiar and because it returned 82% in 2009, when commodity stocks did so well? But what about the Australian government proposal for a 40% tax on mining products, which has roiled the industry there? Are you just picking BHP Billiton because it's a name you know?
- Among the financials, should you buy Goldman Sachs (GS, news, msgs) because it's familiar and because it returned 102% in 2009? Even though it looks like the company could be charged with obstruction of justice by the commission investigating the global financial crisis?
- Among emerging-market stocks, should your pick be Baidu (BIDU, news, msgs) because it's familiar and because it returned 215% in 2009? Are you really betting that another dominant global competitor -- à la Google (GOOG, news, msgs) -- is going to pull out of China's market in the next 12 months?
Maybe you really do want to add these past winners to your watch list for the next bull rally. But I'd advise that you do so only after you've scoured your discomfort zone to find unfamiliar stocks that may be better bets for the next cycle.
