The best stock sectors of the last decade will likely not be the best performers for this coming decade

What's next? Investors should avoid the fallacy that the future will look exactly like the past.

It's often been noted that stocks -- and even sectors -- that outperform one year often underperform the following year. It's called mean reversion, the tendency for most investments to revert to long-term averages."No one knows for sure, but on a sector level, history implies that the best sectors in the prior decade will not repeat as leaders in the coming decade," Sam Stovall, Chief Investment Strategist at CFRA, said in a recent note to clients.

Stovall noted that in the period from 1990-1999, the top three sectors underperformed the following decade on average, while the bottom 3 sectors outperformed.Bottom three sectors from 1990-1999:The same phenomenon happened in the following decade. In 2000-2009, the top 3 sectors , tended to underperform in the next decade , while the bottom three sectors tended to outperform.

Why does mean reversion seem to work as an investment strategy? For the stock market, there are several likely explanations. First, in a capitalist system, underperforming sectors tend to be ruthlessly restructured until they are efficient. Another explanation: Humans tend to continue buying things that keep going up in value, creating bubbles that eventually burst.

Source: News Formal (newsformal.com)

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