Worst pie chart ever.

Worst pie chart ever.

Here at the ol’ FU machine (which is capable of love and hate, FYI), we like to do little experiments. There was that time I tried to figure out if you could blindly pick the worst performing dividend aristocrats and outperform the market, and then there was that time I told y’all to just stop buying train tickets, which are totally similar enough to mention in the same sentence. So yeah, Einstein, I think I know a thing or two about experiments. Don’t you have a baby to make smarter?

But this experiment is going to take the cake. As part of my obsession with beating the market without trying, I got to thinking about a sector rotation strategy that I was certain would do well. It would be simple to execute, be effective, and elevate me to glory. IT WOULD BE CALLED THE SMITH MANEUVER OH GODDAMMIT. Curse my last name straight to hell.

Here’s the plan, in all of its simplistic glory.

You’d choose between the six largest sectors on the TSX — energy, financials, REITs, gold, information technology, or the TSX 60. You’d then figure out which of the sectors did the worst in the preceding year, and pour 100% of your money into it, borrowing an extra 300% just to be safe. Hey, it works for real estate investors.

No, you wouldn’t do that last part. But you would hold that sector for the entire year, switching into¬†that year’s worst performing sector at the beginning of the next year. It’s probably easier to explain it if we just go ahead and do it. Presented in very sexy table form, the results:

Year Sector Result
2005 Gold +21.4%
2006 Info Tech +23.9%
2007 Energy +7.9%
2008 REITs -39.6%
2009 Info Tech +55.7%
2010 Gold +24.5%
2011 Info Tech -20.7%
2012 Info Tech +5.9%
2013 Gold -46.4%
2014 Gold -7.5%
Total -20.8%

It probably goes without saying, but that did not outperform XIU, the ETF equivalent of the TSX 60. Excluding dividends, it rose 87.4% during the decade, absolutely trouncing our effort.

Now before you go ahead and tell all of our attractive lady friends what a moron Nelson is, the experiment actually did quite good up until we ran into a mess with gold. At the end of 2010, the experiment had delivered returns of 52.8% compared to the TSX 60’s performance of 49.9%. And at the end of 2012, it had returned 59.7% compared to the TSX 60 only going up 38.2%.

Basically, it was just the last two years that squashed the theory. Before that, there was some pretty major outperformance, and I think I may know what caused it. I had to limit the search to six sectors because the TSX has a pretty serious over concentration in a few sectors. There have been some recent entries in the ETF space that cover some of these sectors¬†but some cover U.S. stocks as well (i.e. North American sector ETFs) and others weren’t terribly diversified. There’s no way I could include them in the test.

But I can include them in a test for the U.S. market. So let’s try it again, this time focusing on 12 different American sectors, including:

  • Healthcare (IYH)
  • REITs (ICF)
  • Basic materials (IYM)
  • Consumer products (IYK)
  • Energy (IYE)
  • Transportation (IYT)
  • Financials (IYF)
  • Industrials (IYJ)
  • Technology (IYW)
  • Utilities (IDU)
  • Telecom (IYZ)
  • S&P 500 (SPY)

I used these sectors because the ETFs have been around the longest, and because they seemed like a good representation of the whole market. Using the same rules as we did for the Canadian test, how did we do?

Year Sector Result
2005 Tech +2.6%
2006 Telecom +29.7%
2007 Healthcare +7.4%
2008 REITs -45.5%
2009 Financials +20%
2010 Utilities +1.6%
2011 Utilities +14.6%
2012 Materials +5.5%
2013 Utilities +12%
2014 REITs +29.3%
Total +66.3%

Okay, now we’re talking. That’s a pretty solid performance, with only one real dud year in there. Because we had a better selection of sectors, we weren’t stuck taking gold right when it went down the crapper again.

But the experiment still didn’t beat the S&P 500. During the same decade, SPY was up 70.1%, which doesn’t translate into much of an outperformance over a decade, but it’s still there. And remember, the 2015 sector the experiment would have chosen is energy, which has obviously underperformed the broader market. So we’d be further away from the S&P benchmark.

So to sum it up, no, it doesn’t look like you can beat the market just by buying the most beaten up sector blindly. Sorry kids, looks like you’ll have to come up with something else to beat the market. Like pogs. I hear those are a great investment.

Tell everyone, yo!