After the calm of the past two years, the volatility of the months of October and November can be especially hard to handle. Stocks are down quite uniformly, but the technology sector — which is the sector that was outperforming during the market rally — is also leading on the downside.
There are always lessons in studying the past. So, let’s start today with a detailed look at how the main market sectors performed over a few trailing time periods ended November 20, 2018 (the day the Dow Jones Industrial Average erased all the gains for the year).
As you can see in the table below, some sectors have been holding up better than others, most notably the utilities and consumer staples, reflecting — no surprise here — a flight to safety this quarter.
What might come as a surprise, though, is how different the long-term performance of the sectors has been. If there is a discernable trend here, it’s that growth has been strongly rewarded over the past decade. We can clearly see that the sectors that have, because of their structural nature, benefited from the productivity growth and other changes brought on by 21st century technology the most — the fast-growing “growth” sectors — have outperformed.
Compared with the S&P 500’s 244% return over the past 10 years, the tech sector, with its 392% return, was an outstanding performer. However, health care has managed to beat the tech sector with a better than 434% total return over the past decade. Health care, not tech (and not consumer discretionary with its nearly 300% return), has been the absolute champion.
What We Can Learn From This Data
All three of these sectors have something in common: their companies are best-positioned to benefit from the advances made in science and IT. The leading technology, health care, and consumer discretionary stocks did much better than their sectors as a whole. And these are the types of stocks and sectors that I expect to continue providing outsized rewards to early investors. Those are the kinds of stocks we seek in my premium newsletter service, Fast-Track Millionaire .
Because markets only look forward, they are the best mechanism known to mankind of assessing how much a unit of future growth costs today. It’s on the basis of future profits that a company’s value is being created. Think about it this way: if you were buying a corner grocery store, would you be primarily interested in its future sales and profits (and in the health of its neighborhood) or would all your questions be about the last years’ profits?
The same goes for stocks. Price matters, but so does the health of the business and the outlook for the future. And fast growth simply costs more than slow growth.
Now, it just so happens that this fall in the market has been re-pricing its growth. Bargains are being created even as I write .
Of course, nobody really knows how — and when — this market volatility will end.
Long-term investors already have a weapon in their arsenals that allows them to use the volatility to their advantage without needing to guess when the selloff ends and when it’s truly safe to go back into the water.
This tool is called dollar cost averaging, a technique that involves setting a schedule where a fixed dollar amount is invested regardless of share price.
It’s a much more potent method than it might sound. Adding money to one’s investments — whether it’s a favorite stock, a market index, or, better yet, a well-thought-out investment strategy — at regular intervals takes the guesswork out of the process.
Think 401( K ), which, by the way, turned 40 this year. This is not the place or the time to analyze the pros and cons of 401( K )s as the main retirement strategy. But what is good about this way of investing — and what many of us do without even realizing — is that it’s the ultimate dollar-cost average strategy. A 401( K ) investor buys into the market regularly, once or twice per month, rain or shine, according to his or her paycheck schedule. This is not market-timed and not based on the market’s whims. This way, the more expensive market gets the same amount invested but fewer shares, and in a cheaper market — the same amount of money buys more.
Long-term, this is a winning strategy. It disciplines investors, keeps them in the market, and, better yet, stretches the investment dollars.
This strategy is similar to what we do at Fast-Track Millionaire . We search for the best of the best in any market and build a portfolio, using market downturns like this one to add to it. This is how fortunes are made : with a disciplined approach and a strong, rational system.
Let’s stick with growth (which, by the way, can come outside of the traditional tech area) and avoid pitfalls. For my latest recommendations on what to buy (and what to avoid), I recommend reading this special report .
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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