The Danger of Buying Last Year’s Winners
2022 was a unique year… uniquely painful, that is.
Just about everything went down. Stocks fell nearly in unison, both in the U.S. and around the globe. Bonds followed suit. And most commodities took a wild ride, too.
Despite that, 2022 had clear winners and losers. But last year’s script has flipped so far in 2023. Some of the worst performers are now leading the charge. And this change illustrates a crucial lesson:
Last year’s winners rarely keep winning.
Let me explain…
Investing is anything but simple. The problem is, our brains are wired for simplicity. Being able to make quick judgments about the world is great for survival… But in the world of investing, it can cause folks to make big mistakes.
One of these blunders is blindly assuming that what just happened will keep happening.
Yes, trends matter. They’re a powerful tool for making investment decisions. But you’ve got to keep a close eye on the trend… because every trend eventually reverses. And it’s occurring in stocks right now.
To see what I mean, let’s look at how each U.S. sector performed last year…
The overall market fell 18.1%. But some sectors did much better… and some did much worse.
Energy stocks soared an incredible 65.4%. Utilities were slightly positive as well. Meanwhile, four sectors each dropped by 26% or more.
Today, the market has reversed course. Stocks are up 3.4% year to date. But the winners driving that rally have completely flipped. Take a look…
Last year’s three worst performers are the top three best performers this year. And the top four from last year now make up the bottom four. It’s practically a complete reversal from top to bottom.
We can see the same phenomenon at a broader level. The Dow Jones Industrial Average and its “old school” stocks performed relatively well in 2022… while the growth-focused, tech-heavy Nasdaq Composite Index fell the most. But again, it’s the complete opposite so far in 2023. Take a look…
Today, the two indexes have swapped places. The beaten-down Nasdaq is leading the pack. It has jumped nearly 9% in two months. Meanwhile, the Dow is down slightly.
These examples highlight the dangers of blindly assuming – without any data – that the trend will continue. It might happen… But then again, it might not. The message is clear: You can’t afford to get complacent as an investor.
You can and should stick with trends. But when the trend changes course, you need to pivot too…
That means you’re never stuck holding and hoping. You’re never married to a trade. And that’s how you can consistently produce outsized gains.
This article was originally published on this site