sector rotation
An investment strategy that shifts assets between different sectors of the economy based on where the business cycle suggests outperformance will occur next.
Example
“As the economy slowed, investors engaged in sector rotation from cyclical stocks into defensive sectors like utilities and healthcare.”
Memory Tip
SECTOR ROTATION = moving money between sectors as the economic cycle turns.
Why It Matters
Sector rotation helps investors optimize their portfolio returns by positioning capital in areas of the economy expected to perform best during different phases of economic growth. Understanding this strategy can help you avoid holding underperforming sectors while missing gains in emerging ones.
Common Misconception
Many people believe sector rotation requires perfectly timing the market and switching investments frequently, but successful rotation is actually about gradually shifting allocations based on economic indicators and business cycle stages rather than making dramatic sudden changes.
In Practice
During an economic recovery, an investor might reduce technology holdings from 30 percent to 15 percent of their portfolio and increase industrial and financial stocks from 10 percent to 25 percent, anticipating these sectors will outperform as manufacturing and business expansion accelerate. As the economy begins to slow, they would reverse this by moving back into defensive sectors like utilities and consumer staples.
Etymology
SECTOR (industry group) ROTATION (turning from one to another). Rotating capital between SECTORS.
Common Misspellings
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