The Worst Sectors to Invest In and How to Benefit from It

Sector trading and investing is a type of strategy where an investor focuses on buying or investing (and later selling) securities within a specific sector of the economy. For example, an investor may focus on buying and selling stocks within the technology sector, or stocks within the energy sector. Sector trading is a form of active trading that might involve a higher level of risk than investing in the broad stock market. What are the worst sectors to invest in?

The worst sectors to invest in are information technology, energy, utilities, and materials. These sectors have the lowest median returns.

First, let’s explain what industries and sectors are:

Industry vs sector

These two definitions seem at first the same, but they are different. What is the difference between the seemingly same meaning?

Industry refers to a specific branch of economic activity, such as the automotive industry or the pharmaceutical industry. It is typically defined by the type of goods or services it creates, such as cars, pharmaceuticals, or technology.

Sector is a broader category that groups multiple industries together. For example, the automotive, pharmaceutical, and technology industries can all be grouped together under the technology sector. The sector level is typically divided into two categories: cyclical and non-cyclical. Cyclical sectors are those that are affected by the economic cycle, such as the automotive industry. Non-cyclical sectors are those that are less affected by the economic cycle, such as the pharmaceutical industry.

How many sectors are there in the stock market?

S&P has divided the stock market into 11 sectors (in parenthesis we have the ticker code of the oldest ETF that tracks the sector):

  • Information technology (XLK)
  • Healthcare (XLV)
  • Financials (XLF)
  • Consumer discretionary (XLY)
  • Communication services (XLC)
  • Industrials (XLI)
  • Energy (XLE)
  • Utilities (XLU)
  • Real estate (VNQ)
  • Materials (XLB)

We have covered each of the sectors with a strategy and backtest:

Sector trading strategies and systems (backtest)

Here’s our list of sectors:

How to measure the worst sector to invest in

We base the research and conclusions in this article on research done by JP Morgan in a research paper from 2015 called The Agony And The Extasy – The Risks And Rewards Of A Concentrated Stock Portfolio. This is an extremely interesting read and is packed with statics and data, something that every data-driven trader or investor love.

Before we delve into JP Morgan’s research paper, let’s have a look at why it’s important to know the worst sector to invest in:

Why you should know the worst sectors to invest in (how you can benefit)

In the stock market, we tend to focus on the winners, but we can probably learn a lot more by looking at the failures and losers. When we see a successful company or stock, we tend to forget that there are many more losers for every winner.

It might be smart to focus on the losers and how to avoid them. Perhaps returns can be improved simply by ignoring the worst sectors to invest in?

It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.

Charlie Munger

Charlie Munger is known for his thoughts on inverse thinking. What does inverse thinking mean?

Inverse thinking is a way of looking at problems or solutions from a different perspective. It involves considering the opposite of what is normally assumed and taking a different approach to a problem. It involves looking at the problem from a different angle and asking different questions than you would normally ask in order to come up with a unique solution.

Here are two examples of inverse thinking: