Why past performance is not a guide for future returns
- Schroders Investment Team
- 19 November 2024
- 3 mins reading time
In 12 of the past 18 years, not a single US stock that was a top performer one year made it to the top 10 the next year. Only a few managed to stay in the top 100 for two years in a row. This shows the risks of chasing last year’s stock market winners.
Most top performers drop significantly the next year. In 14 out of 18 years, top 10 stocks fell to the bottom half of the rankings the following year. This trend is similar in other markets like Japan, the UK, and Germany.
The lessons:
As human beings, we love a winning story. But this can mislead us. Value investing, which involves buying less popular stocks, is hard because it goes against our instincts.
Investors should be cautious about chasing performance. High gains can lead to inflated stock prices and unrealistic expectations. For example, Tesla once traded at over 200 times its expected earnings.
The “Magnificent-7” stocks (Apple, Microsoft, Nvidia, Alphabet, Amazon, Meta Platforms, Tesla) are twice as expensive as the rest of the market. Some companies might meet these high expectations, but many won’t. Even a small earnings miss or a minor change in the market can cause a big drop in the stock prices of popular companies.
Long-term winners are usually not the best performers in any single year but those that grow sustainably over time. Consistent growth via Active Management – a team of skilled investment professionals who research, analyse and make investment decisions, can potentially lead to better investment returns than chasing the hottest stocks.
For example, $100 invested in a stock that grows 10% annually for three years will be worth $133. But if the stock’s performance is erratic (up 20%, down 10%, up 20%), $100 would only grow to $130.
While momentum investing has been popular, blindly chasing top performers can result in high costs and mediocre returns. As Public Enemy said, “don’t believe the hype.”
* Apple, Microsoft, Nvidia, Alphabet, Amazon, Meta Platforms, Tesla
Important information
A version of this article was originally published in FT Alphaville.
This article has been adapted using Microsoft Co-pilot.
The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors might not get back their initial investment.
Schroders Investment Management (SIM) provides investment management and advice services for SPW funds and portfolio’s respectively.
This article is for information purposes only and is not intended as investment advice.
Forecasts of future performance are not a reliable guide to actual results neither is past performance a guide to future returns.
The views expressed in this article are those of the contributor(s) as at the time of publishing and may not reflect the views of Schroders Personal Wealth. Any views expressed should not be taken as statements of fact nor relied upon when making financial decisions. Fees and charges apply at Schroders Personal Wealth. This content may not be used, copied, quoted, circulated or otherwise disclosed (in whole or in part) without our prior written consent. In preparing this article we have used third party sources which we believe to be true and accurate at the date of writing. However, we can give no assurances or warranty regarding the accuracy, currency or applicability of any of the contents in relation to specific situations and particular circumstances.
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