{"id":17548,"date":"2025-01-30T08:59:39","date_gmt":"2025-01-30T16:59:39","guid":{"rendered":"https:\/\/canary.kcprod.info/blog\/?p=17548"},"modified":"2025-01-30T08:59:41","modified_gmt":"2025-01-30T16:59:41","slug":"burt-alex-letter-winter-2025","status":"publish","type":"post","link":"https:\/\/canary.kcprod.info/blog\/burt-alex-letter-winter-2025\/","title":{"rendered":"Don\u2019t Just Buy Last Year\u2019s Winners"},"content":{"rendered":"\n<p>The end of one calendar year and the start of the next is when many Wall Street gurus present their \u201cplaybooks\u201d for the year ahead. The predictions in these playbooks are <a href=\"https:\/\/www.wealthfront.com\/blog\/2024-predictions\/\">frequently incorrect<\/a>, and might encourage you to concentrate your portfolio in specific sectors or even specific stocks that performed well over the previous year. In a previous article, we wrote about <a href=\"https:\/\/www.wealthfront.com\/blog\/burt-alex-letter-summer-2024\/\">the dangers of trying to pick the winning sector<\/a>. In this post, we\u2019ll explain why you probably shouldn\u2019t just invest in last year\u2019s winning stocks.<\/p>\n\n\n\n<p>This advice to buy last year\u2019s winners might sound wise\u2014after all, if a stock has previously performed well, shouldn\u2019t it continue to do so? Not necessarily. Actively switching your portfolio to favor certain stocks is not only tax-inefficient, but it is also likely to result in adding risk and lowering your investment returns.<\/p>\n\n\n\n<p>But you don\u2019t have to take our word for it. In this post, we\u2019ll share some historical data to show what would have happened if you had only invested in the previous year\u2019s best-performing stocks each year, and repeated this strategy over time.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">What happens if you only buy last year\u2019s best-performing stocks?<\/h2>\n\n\n\n<p>Let\u2019s imagine that each year on January 1, you purchased the previous year\u2019s best-performing US stocks (we\u2019ll call this the \u201cwinners\u201d portfolio) and then held them for the full year, only to sell your portfolio and repeat this process on the following January 1. For simplicity, we\u2019ll ignore the impact of taxes and any fees or other transaction costs. We analyzed what would have happened if you followed this strategy from 1964 through the end of 2023\u2014the longest period for which we have stock-level data. For robustness, we\u2019ll test a variety of \u201cwinners\u201d strategies by varying two inputs:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>The number of stocks chosen for the portfolio: 5, 10, 15, and 20<\/li>\n\n\n\n<li>The size of companies eligible for inclusion. We express this as a fraction of the total US market capitalization, and again use four different values: 85% (chosen to include most large-cap stocks), as well as 90%, 95%, and 98% (which we chose to include medium- and small-cap stocks).<\/li>\n<\/ul>\n\n\n\n<p>The chart below shows the cumulative return of the average of all 16 \u201cwinner\u201d portfolios, along with the cumulative return of the US stock market. <strong>On average, the \u201cwinners\u201d portfolios we studied performed worse, for the most part, than the total US stock market over the analysis period. <\/strong>This is true even though we excluded companies that would have gone bankrupt or stopped trading during the current year from the \u201cwinners\u201d portfolios (we did this to avoid situations where we did not have a full year of data).&nbsp;<\/p>\n\n\n\n<figure class=\"wp-block-image size-full\"><img loading=\"lazy\" decoding=\"async\" width=\"2136\" height=\"1433\" src=\"https:\/\/canary.kcprod.info/blog\/wp-content\/uploads\/2025\/01\/US-stock-market-vs-average-winners-portfolio-1.png\" alt=\"\" class=\"wp-image-17554\" srcset=\"https:\/\/canary.kcprod.info/blog\/wp-content\/uploads\/2025\/01\/US-stock-market-vs-average-winners-portfolio-1.png 2136w, https:\/\/canary.kcprod.info/blog\/wp-content\/uploads\/2025\/01\/US-stock-market-vs-average-winners-portfolio-1-640x429.png 640w, https:\/\/canary.kcprod.info/blog\/wp-content\/uploads\/2025\/01\/US-stock-market-vs-average-winners-portfolio-1-790x530.png 790w, https:\/\/canary.kcprod.info/blog\/wp-content\/uploads\/2025\/01\/US-stock-market-vs-average-winners-portfolio-1-768x515.png 768w, https:\/\/canary.kcprod.info/blog\/wp-content\/uploads\/2025\/01\/US-stock-market-vs-average-winners-portfolio-1-1536x1030.png 1536w, https:\/\/canary.kcprod.info/blog\/wp-content\/uploads\/2025\/01\/US-stock-market-vs-average-winners-portfolio-1-2048x1374.png 2048w\" sizes=\"auto, (max-width: 2136px) 100vw, 2136px\" \/><\/figure>\n\n\n\n<p>It\u2019s worth noting that during the internet bubble of the late 1990s, the average \u201cwinners\u201d portfolio <em>did<\/em> beat the US stock market handily. This is largely because tech stocks that performed well in 1998 (including Amazon, AOL, Yahoo, Dell, Best Buy, and Apple) also performed well in 1999. The average \u201cwinners\u201d portfolio beat the US stock market for much of the 2000s, too. But over the whole period included in our analysis, the average \u201cwinners\u201d portfolio return was 9.64%\u20140.73% lower than the 10.37% US stock market return.&nbsp;<\/p>\n\n\n\n<p>The average \u201cwinners\u201d strategy was also <em>far<\/em> more volatile than the US stock market. Annualized volatility for the \u201cwinners\u201d average portfolio was 43.13% compared to just 17.46% for the US stock market. Higher volatility matters because it can be difficult for investors to stomach, and ultimately it can cause them to sell at inopportune times which can lower returns. Consider that the worst calendar year for the \u201cwinners\u201d average portfolio was a staggering -55.70% return, whereas the worst calendar year return for the US stock market over the analysis period was just -36.74%.<\/p>\n\n\n\n<figure class=\"wp-block-image size-full\"><img loading=\"lazy\" decoding=\"async\" width=\"2136\" height=\"1433\" src=\"https:\/\/canary.kcprod.info/blog\/wp-content\/uploads\/2025\/01\/Momentum-and-Market-Returns.png\" alt=\"\" class=\"wp-image-17550\" srcset=\"https:\/\/canary.kcprod.info/blog\/wp-content\/uploads\/2025\/01\/Momentum-and-Market-Returns.png 2136w, https:\/\/canary.kcprod.info/blog\/wp-content\/uploads\/2025\/01\/Momentum-and-Market-Returns-640x429.png 640w, https:\/\/canary.kcprod.info/blog\/wp-content\/uploads\/2025\/01\/Momentum-and-Market-Returns-790x530.png 790w, https:\/\/canary.kcprod.info/blog\/wp-content\/uploads\/2025\/01\/Momentum-and-Market-Returns-768x515.png 768w, https:\/\/canary.kcprod.info/blog\/wp-content\/uploads\/2025\/01\/Momentum-and-Market-Returns-1536x1030.png 1536w, https:\/\/canary.kcprod.info/blog\/wp-content\/uploads\/2025\/01\/Momentum-and-Market-Returns-2048x1374.png 2048w\" sizes=\"auto, (max-width: 2136px) 100vw, 2136px\" \/><\/figure>\n\n\n\n<h2 class=\"wp-block-heading\">A closer look at the 16 \u201cwinners\u201d portfolios<\/h2>\n\n\n\n<p>Let\u2019s take a closer look at the \u201cwinners\u201d portfolios. Our first observation is the wide range of results from the \u201cwinners\u201d strategies. While the average return across all 16 was 9.64%, there was enormous variation around this average, ranging from -1.57% for five stocks and 98% of US market cap to 11.86% for five stocks and 85% of US market cap.&nbsp;<\/p>\n\n\n\n<p>We counted the number of years during which the \u201cwinners\u201d portfolio had a better return than the US stock market overall, and found that this was the case under half of the time (46.15%). That means that, if you pursued the \u201cwinners\u201d portfolio, you would spend time and effort implementing a strategy that, on average, had worse than coin-flip odds of outperforming a passive investment in the entire US stock market. And this is <em>before<\/em> you take into account the potential tax consequences of the \u201cwinners\u201d approach (remember: gains on investments you hold for a year or less are generally taxed at higher, ordinary income rates whereas investments you hold for longer are generally taxed at lower, long-term capital gains rates) and the fact that you\u2019d have to be able to tolerate a higher level of volatility to actually realize the returns presented in this research.&nbsp;<\/p>\n\n\n\n<p>It is true that sometimes, the \u201cwinners\u201d approach had higher pre-tax returns than the US stock market. But do we think there\u2019s something special about the \u201cwinners\u201d portfolios that outperformed the US stock market, such that we would want to pursue those individual strategies going forward? No. The \u201cwinners\u201d strategies all produce extremely volatile results; it\u2019s not unexpected that several of the strategies achieved a better return over such a long period.<\/p>\n\n\n\n<figure class=\"wp-block-image size-full\"><img loading=\"lazy\" decoding=\"async\" width=\"2136\" height=\"1433\" src=\"https:\/\/canary.kcprod.info/blog\/wp-content\/uploads\/2025\/01\/US-stock-market-vs-average-16-winners-portfolio-1.png\" alt=\"\" class=\"wp-image-17552\" srcset=\"https:\/\/canary.kcprod.info/blog\/wp-content\/uploads\/2025\/01\/US-stock-market-vs-average-16-winners-portfolio-1.png 2136w, https:\/\/canary.kcprod.info/blog\/wp-content\/uploads\/2025\/01\/US-stock-market-vs-average-16-winners-portfolio-1-640x429.png 640w, https:\/\/canary.kcprod.info/blog\/wp-content\/uploads\/2025\/01\/US-stock-market-vs-average-16-winners-portfolio-1-790x530.png 790w, https:\/\/canary.kcprod.info/blog\/wp-content\/uploads\/2025\/01\/US-stock-market-vs-average-16-winners-portfolio-1-768x515.png 768w, https:\/\/canary.kcprod.info/blog\/wp-content\/uploads\/2025\/01\/US-stock-market-vs-average-16-winners-portfolio-1-1536x1030.png 1536w, https:\/\/canary.kcprod.info/blog\/wp-content\/uploads\/2025\/01\/US-stock-market-vs-average-16-winners-portfolio-1-2048x1374.png 2048w\" sizes=\"auto, (max-width: 2136px) 100vw, 2136px\" \/><\/figure>\n\n\n\n<p>Some investors successfully implement a more sophisticated and labor-intensive version of the \u201cwinners\u201d portfolio called <em>momentum<\/em> investing. Put simply, momentum investing involves buying stocks that are already performing well with the expectation that they will continue to do so. <a href=\"https:\/\/www.bauer.uh.edu\/rsusmel\/phd\/jegadeesh-titman93.pdf\">Research<\/a> has confirmed that momentum investing can be a good strategy in some cases (in fact, momentum is one of five factors in <a href=\"https:\/\/support.wealthfront.com\/hc\/en-us\/articles\/115002707243-Wealthfront-s-Smart-Beta\">Wealthfront\u2019s Smart Beta<\/a>), but unlike the \u201cwinners\u201d strategy described in this post, it requires a lot of diligence in regularly monitoring the market and acting quickly, both to sell stocks that are underperforming and to buy those that are performing well over short time periods. An amateur investor isn\u2019t likely to have the time, energy, and patience to execute it successfully.&nbsp;<\/p>\n\n\n\n<p>And even though more sophisticated momentum strategies can beat the market on average over long periods of time, they may also underperform for long periods of time. Momentum makes the most sense as part of a multi-factor strategy that uses other factors that are relatively uncorrelated\u2014you can think of this as a form of <a href=\"https:\/\/www.wealthfront.com\/blog\/what-is-diversification\/\">diversification<\/a>, but with factors rather than assets.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">What should you do instead?<\/h2>\n\n\n\n<p>Instead of wasting time and energy trying to outperform the market, we suggest that you keep it simple. The evidence is clear and consistent over time: Passively investing in index funds is a wise and time-tested strategy. According to a <a href=\"https:\/\/www.wsj.com\/finance\/investing\/why-your-fund-manager-cant-beat-todays-stock-market-a5a14688\"><em>Wall Street Journal<\/em> analysis of Morningstar research<\/a> from the first half of 2024, more than 80% of actively managed ETFs and mutual funds that benchmark against the S&amp;P 500\u00ae performed worse than the index. Similarly, according to a <a href=\"https:\/\/www.spglobal.com\/spdji\/en\/documents\/spiva\/spiva-us-mid-year-2024.pdf\">SPIVA report<\/a>, in the first half of 2024, broad-based, low-cost index funds provided larger returns than nearly two-thirds of actively managed large- and mid-cap equities portfolios that attempted to pick the best stocks or best types of stocks. And the one-third of active managers who outperform the market in one year are not likely to do so in the subsequent year.<\/p>\n\n\n\n<p>You should also keep in mind that a <a href=\"https:\/\/www.wealthfront.com\/blog\/what-is-diversification\/\">well diversified<\/a> portfolio like <a href=\"https:\/\/www.wealthfront.com\/explore\/portfolios\/core\/classic\">Wealthfront\u2019s Classic portfolio<\/a> will, in most cases, still give you exposure to last year\u2019s winning stocks through index-based ETFs. So will <a href=\"https:\/\/www.wealthfront.com\/sp500-direct\">Wealthfront\u2019s S&amp;P 500 Direct<\/a>, which offers similar performance to an S&amp;P 500\u00ae ETF. (As a bonus, both accounts can also generate valuable tax savings through our automated Tax-Loss Harvesting.) We don\u2019t think you should avoid having last year\u2019s winning stocks in your portfolio\u2014we just don\u2019t think they should constitute your <em>entire<\/em> portfolio.&nbsp;<\/p>\n","protected":false},"excerpt":{"rendered":"<p>The end of one calendar year and the start of the next is when many Wall Street gurus present their \u201cplaybooks\u201d for the year ahead. The predictions in these playbooks are frequently incorrect, and might encourage you to concentrate your portfolio in specific sectors or even specific stocks that performed well over the previous year. [&hellip;]<\/p>\n","protected":false},"author":65,"featured_media":17558,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"inline_featured_image":false,"footnotes":""},"categories":[1315,1282],"tags":[],"coauthors":[522,1270],"class_list":["post-17548","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-industry-insights","category-investing"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v24.3 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Don\u2019t Just Buy Last Year\u2019s Winners | Wealthfront<\/title>\n<meta name=\"description\" content=\"Wealthfront\u2019s experts explain the problem with only buying last year\u2019s best-performing stocks.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/canary.kcprod.info/blog\/burt-alex-letter-winter-2025\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Don\u2019t Just Buy Last Year\u2019s Winners | Wealthfront\" \/>\n<meta property=\"og:description\" content=\"Wealthfront\u2019s experts explain the problem with only buying last year\u2019s best-performing stocks.\" \/>\n<meta property=\"og:url\" content=\"https:\/\/canary.kcprod.info/blog\/burt-alex-letter-winter-2025\/\" \/>\n<meta property=\"og:site_name\" content=\"Wealthfront Blog\" \/>\n<meta property=\"article:published_time\" content=\"2025-01-30T16:59:39+00:00\" \/>\n<meta property=\"article:modified_time\" content=\"2025-01-30T16:59:41+00:00\" \/>\n<meta property=\"og:image\" content=\"https:\/\/canary.kcprod.info/blog\/wp-content\/uploads\/2025\/01\/BA3-Blog-Header.png\" \/>\n\t<meta property=\"og:image:width\" content=\"4801\" \/>\n\t<meta property=\"og:image:height\" content=\"1800\" \/>\n\t<meta property=\"og:image:type\" content=\"image\/png\" \/>\n<meta name=\"author\" content=\"Burton G. 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Dr. Malkiel, also the author of The Elements of Investing, is one of the country\u2019s leading investor advocates.\",\"url\":\"https:\/\/canary.kcprod.info/blog\/author\/burt\/\"}]}<\/script>\n<!-- \/ Yoast SEO plugin. -->","yoast_head_json":{"title":"Don\u2019t Just Buy Last Year\u2019s Winners | Wealthfront","description":"Wealthfront\u2019s experts explain the problem with only buying last year\u2019s best-performing stocks.","robots":{"index":"index","follow":"follow","max-snippet":"max-snippet:-1","max-image-preview":"max-image-preview:large","max-video-preview":"max-video-preview:-1"},"canonical":"https:\/\/canary.kcprod.info/blog\/burt-alex-letter-winter-2025\/","og_locale":"en_US","og_type":"article","og_title":"Don\u2019t Just Buy Last Year\u2019s Winners | Wealthfront","og_description":"Wealthfront\u2019s experts explain the problem with only buying last year\u2019s best-performing stocks.","og_url":"https:\/\/canary.kcprod.info/blog\/burt-alex-letter-winter-2025\/","og_site_name":"Wealthfront Blog","article_published_time":"2025-01-30T16:59:39+00:00","article_modified_time":"2025-01-30T16:59:41+00:00","og_image":[{"width":4801,"height":1800,"url":"https:\/\/canary.kcprod.info/blog\/wp-content\/uploads\/2025\/01\/BA3-Blog-Header.png","type":"image\/png"}],"author":"Burton G. 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