Investors should watch where the money is flowing, not where it has been
The secret to investing successfully is to know where the money is flowing.
Although, for retail investors this can be a little challenging depending on what you want to invest in.
But if you decide to invest in the stock market it is very easy to track the money flow, as the data is always transparent and easy to find on the ASX website among others.
The best way to identify where the money is flowing is to look at each sector and how they are performing.
For example, since 1 January 2020, the Technology sector has been the top performer up around 40 per cent, while Energy has been the worst performer down nearly 40 per cent.
By following each sector, you can narrow down the potential opportunities in the market, so you only invest in those sectors that are performing.
Alternatively, you can take the contrarian view and find opportunities in sectors that are underperforming and likely to turn around, such as Energy.
It is also important to understand that sectors, such as Financials and Materials, account for over 45 per cent of the total All Ordinaries index and movements in these sectors will have a significant impact on the performance of the market.
Energy and Information Technology, on the other hand, only make up around 7 per cent of the market, and, therefore, have a much lesser impact on the market.
For example, in reviewing the performance of the All Ordinaries Index this year, the Financial sector is down over 14 per cent, while the Material sector is up 2 percent and, as a result, the All Ordinaries Index is down around 4 per cent.
However, this represents opportunity, because if the Financial and Material sectors are falling or going sideways, other sectors in the market are potentially moving up, as we have seen with Technology stocks this year.
That said, as I previously mentioned, it is more important to focus your attention on where the money is flowing rather than where it has been.
Right now, I believe Technology has had its run and will slow in 2021, and, as such, opportunities in this sector will be limited.
Whereas the sectors likely to see the money flow in 2021 are Energy, Materials and Financials, which is why I recommend investors look at these sectors, as they may present some very good opportunities in the coming year.
Dale Gillham is Chief Analyst at Wealth Within and international bestselling author of How to Beat the Managed Funds by 20%. He is also the author of the award-winning book Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in all good bookstores and online at www.wealthwithin.com.au