How to beat the average return of the broader market over time?


Stock prices are determined in the marketplace. Every stock exchange creates broader indices that reflect how a market is doing. If you observe the constituents of a broader index, let’s say Nifty, you would realise that sometime one or two stocks alone push the index up or down.

In equities, certain sections of the market almost regularly do an excellent job of making fortunes for investors. If you want to beat the stock market average over time, one way to do it is to invest in the best sectors of the market.

Certain sectors perform better than others. So if the market is heading higher, investors should buy stocks in the sectors that are performing best. There are always some secular themes that will outperform broader indices irrespective of market conditions.

So, as an investor, one should look at the sectoral indices and their performance. Stock exchanges, too, create sectoral indices to reflect how a particular sector is doing.

By looking at the sectoral indices in different time frames like a week, month, three months or year to date, one can assess which one are outperforming and which ones underperforming. After having a look at the sectors that are flying, the next job is to have a look at its constituents to figure out the stocks that are performing best. This exercise would throw up a list of good performing stocks. One can then use technical or fundamental analysis on that set of stocks to build the foundation for a trading or investing strategy.

Although economies suffered a lot due to the Covid pandemic, the markets continue to make new highs. Though most of the sectors were adversely affected by the Covid-19 disruption, most have made a strong comeback. An investor who has invested in the broader market index in the last one year must have made decent returns. However, if s/he had invested in a specific sector such as metals, IT etc, s/he would have made outsized gains. For any investor with clear goals and an essential understanding of sectors, Calendar 2021 has brought plenty of new opportunities.

Also, one should always go for sectoral rotation, which is a commonly used financial strategy. It allows one to lessen the risk of high exposure to one sector, while minimising exposure to other sectors. One needs to look for good companies within a sector that can do well in the long run. Just because a sector is moving higher does not mean all the stocks within that sector will be great performers. Investors should look for companies that have decent financials and are preferable market leaders. Management guidance for the companies can give an idea about the outlook of various sectors. By analyzing several timeframes, we can pick the hottest sectors that are not just performing well right now, but also showing strength over a longer period. Sectors like IT, pharma, FMCG and financial services have been long-term value and wealth creators. One should construct a portfolio that is aligned to such investment strategies.

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