Is rotating sectors at business-cycle stages an optimal investment strategy ?

Area : United States

Time frame : 1948 - 2007

Result : best case scenario : small annual performance by correctly timing sector investments with business-cycles stages but it quickly dissipates without the benefit of perfect hindsight and after an allowance for transaction costs.

So : don't waste your time trying to time your sector investments

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Sector Rotation over Business-Cycles

Jeffrey Stangl
Massey University - Department of Commerce

Ben Jacobsen
Massey University - Department of Commerce

Nuttawat Visaltanachoti
Massey University

March 1, 2008

Abstract:
Sector rotation is a widely followed strategy in the investment community. Conventional market wisdom suggests that timing investments in particular sectors with different business-cycle stages generates additional performance. We introduce a very simple way to test its value. We examine the performance of a strategy that perfectly rotates sectors in accordance with conventional market wisdom over business-cycles since 1948. We find that even 20/20 hindsight investors would have realized at best a 2.5% annual outperformance by correctly timing their sector investments with business-cycles stages. The profits of this best case scenario however quickly dissipate without the benefit of perfect hindsight and after an allowance for transaction costs.

Full paper : http://papers.ssrn.com/sol3/papers.cfm?abstract_id=999100

Short version : http://www.inassociation.com.au/publications/infinz_journal/html/documents/INFINZSept08-Timingthecycles.pdf