A reader asks:
Can you tell us what percentage of stocks that beat the S&P in the last five years also beat the S&P in the five years before that? I’m curious to know which names appear in both lists, where factors such as pre- and post-COVID, and pre- and post-AI play a role. Maybe you can also talk about how stocks that beat the S&P over a five-year period will do on average over the next five years.
This is a good question because so many investors are concerned about the concentration in the S&P 500.
It certainly feels like it should be a small number of stocks that have outperformed.
In the five-year period from 2016 through 2020, the S&P 500 rose just over 100%. From 2021 through this week, the S&P 500 is now up about 90% overall.
These are both very good returns of about 14%-15% per year.
How many stocks outperformed over this five-year period?
The number was higher than I thought it would be.
One caveat should be noted: stocks have moved in and out of the index over this period. Turnover in the S&P 500 is not that high, but probably averages 2-4% per year.
By my calculations, 149 stocks outperformed the index in the five years ending in 2020. That’s about 30% of the total. That’s a pretty low number.
Over the past five years, 241 stocks outperformed the return of the S&P 500. That is more than 50% of the total. That’s not bad.
How many performed better in both periods?
I counted 40 shares.
Here’s a list of the tickers for those stocks:
You know a lot of names: Microsoft, Google, Nvidia, Walmart, JP Morgan, Costco and Broadcom. Nvidia’s results were exceptionally good in both periods, up 1,500% and 1,300% respectively.
Some surprising names also outperformed in each five-year period: Hilton, Caterpillar and Deckers Outdoors, to name a few.
The stock market is becoming increasingly concentrated at the top, but the number of stocks that outperform the index each year is probably greater than you think. Here’s a look at the number of stocks that outperformed the index performance each year, going back to 1990:
The average is just under 50% of the total each year.
It’s interesting that basically every year it’s a question of whether you will perform better with individual securities or not.
The profit rate for better performing stocks falls to about a third over the past 10, 15 and 20 years.
Even with a 50% annual percentage gain, picking stocks isn’t easy. But choosing the stock picks that outperform the market is even more difficult.
SPIVA updates it every year Persistence Scorecard to see how many professional fund managers can achieve better returns in successive multi-year periods.
The numbers are terrible.
Take a look at this diagram:
About 2% of all large-cap funds were able to remain in the top half of returns for their category for five years in a row. It gets worse the further away you go.
SPIVA notices this zero funds that were in the top quartile as of December 2020 remained in the top quartile for the next four years. None of the 2022 top quartile funds were in the top quartile for the next two years. Not one.
And of course the number of funds that perform better in the long term is also small:
Over fifteen to twenty years, only about 10% of all actively managed funds outperform.
It is difficult to surpass. Consistently performing better is virtually unheard of these days.
If you start investing actively, be prepared for strong returns, even from the small number of funds and investors that do outperform.
I think one of the reasons why the win rate for the number of outperforming stocks is higher than the win rate for the outperformance of funds is that buy-and-hold is a psychologically difficult strategy to hold.
It’s hard to pick the winning stocks, but staying invested in them can be even harder.
Buy-and-hold is probably your best bet if you own individual stocks, but it’s not easy to sit back and wait.
I answered this question in detail in this week’s all-new Ask the Compound:
We also discussed questions about how to die with zero, how diversification works in practice, the Dave Ramsey portfolio, and when to make your 529 account more diversified and conservative.
Further reading:
When Buy-and-Hold Dies
#stocks #outperform #stock #market #wealth #common #sense