Honest investors can attest that stock picking is hard. A strong conviction pick can lead to out-performance one year and under-performance the next. Or, vice-versa.
I recently saw a discussion on Twitter among financial professionals based on the following question:
Without Googling the answer, what is the best performing US stock over the last 20 years?
Some of the responses included companies like:
I responded with Phillip Morris (PM).
The correct answer: Monster Beverage (MNST). By a lot!
Would you have guessed that one correctly?
Over the past 20 years, Monster Beverage stock has returned a whopping 130,697%!
Yes, you’re reading that number correctly. In fact, it’s YTD total return is near 35%. Good news – 66% of the outstanding shares are held by institutions. Odds are you can find it in one (or more) of your mutual funds or ETFs.
The next highest stock is Apple with a 20 year total return of 61,169% – numerically less than half.
Interestingly enough, when you look at top performers over the past 5, 10, and 15 years, Monster is #17 in the past 15 years and then doesn’t crack the top 20 stocks in the recent 5 or 10 year periods.
If you look at the results, a lot of stocks fall in and out of favor over various time periods. This is why time in the market beats timing the market.
As I write this post, the current darling is Nvidia. The stock price has just recently regained it’s December 2021 high after a price decline of roughly 65% through 2022.
Since it’s October 2022 low, the stock has rocketed back near 238% as of today’s trade price. in October 2018 the stock dropped a quick 54%, fully recovering in late April 2020.
A stock like this that makes big swings requires one to have a strong stomach and lots of patience. It’s one you wish you would have bought at it’s low, never mind that psychologically the lows are where many people get scared out of owning stocks.
Below is NVDA’s 10-year chart with Relative Strength Indicator at the bottom.
Then, there are doozies. These are stocks that performed well in one year but not the next. This happens all the time. In fact, investing in last year’s high performers can be a recipe for disappointment.
The best performing stock of 2022 was Occidental Petroleum (OXY), with a total return of 119.1%. The stock is now down a little more than 22% Since hitting it’s high in early November 2022.
Speaking of a strong stomach and patience, below is OXY’s 10-year chart with Relative Strength Indicator at the bottom.
Making investment decisions based on recent performance is akin to the proverbial “live by the sword, die by the sword.” Charts like these can be helpful for technical analysis and spotting trends. They can also be completely non-helpful for long-term investors who may tempted to buy or sell based on timing.
I’ve made the wrong calls in my own portfolio at times when I’ve tried to outsmart the market. I have several of these stories, and my own mistakes are why I’m slow to trade and rebalance in client accounts. Temporary underperformance – like in 2021 – eventually leads to steady performance and sometimes even outperformance – like in 2022.
Admittedly, I’ve been tempted to trade on changing trends at times. However, I must remember my criteria for making the investment in the first place, the long-term fundamentals.
I believe a lot of investment mistakes are made when investors invest without a dependable investment discipline. Fear and FOMO are often the basis for investment decisions. When you violate a defined investment discipline, you’re likely chasing things that are hazardous to your wealth.
To create your investment discipline, start with defining the reasons you wish to invest. What is the purpose for any performance results you achieve? Are you funding education, saving for a specific purchase over the next 2-5 years, or providing retirement income? Knowing your purpose is the best barometer for staying on track.
Then, decide the time period you intend to invest. The longer the time period, the more patience you can exercise through market volatility. There will always be market volatility for all sorts of reasons. Long-term investors should not be driven by fear and FOMO. Rather, they should be cautious of fear and FOMO and use these opportunities to rebalance portfolios.
Next, understand the amount of risk you are comfortable taking with your investment strategy. Risk is a key component to investment selection and allocation. Fear and FOMO can influence your feelings about risk, so try to assess from a mindset of steady markets.
Now that you have your purpose, your time frame, and your risk tolerance, set your allocation accordingly. As an example: using the Nitrogen Risk Number® methodology, if your speed limit is 65, an allocation of 65% or so to stocks is probably most appropriate.
For moderate investors with a longer time frame a sample strategic allocation might look like:
This sample allocation can be dialed up or dialed down based on your purpose, time frame, and risk tolerance.
Short-term investors may want to take the extra step to set up and down limits on investment results. As a basic example: an investment that rises by 10% or declines by 10% over a 1 year period should be evaluated and potentially sold.
If you aren’t sure how to evaluate individual stocks or bonds, consider index ETFs or mutual funds. Choosing a fund for an entire index such as the S&P 500, factor funds like growth or value, or sector funds like tech or healthcare, ETFs and mutual funds participate in the collective growth of many companies.
The key to investment success over time is setting your asset allocation, occasionally rebalancing, and avoiding emotional decisions based on fear and FOMO. If a stock you don’t own starts ripping, you may not want to chase it. If a stock you own falls fast, you may not want to sell it.
An investment discipline keeps you top of what you own, why you own it, and for what time period. Sticking to your strategy helps you ride the inevitable volatility waves that come with investing and avoid the trap of chasing performance.
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