As an investor, you’ve likely heard (and hopefully heeded) the familiar warning that past performance is not a reliable indicator of future results.
While this may seem like a standard disclaimer financial planners are required to provide, research from Schroders has revealed that top-performing US stocks often struggle to maintain their momentum in subsequent years. Indeed, many become among the worst-performing shortly after.
So, while you might feel tempted to chase the latest hype or hop onto a winning bandwagon, this approach may not lead to sustained growth and stability. Instead, it can expose you to unnecessary risks and volatility.
Read on to discover why following the latest investment trends may not be the most effective strategy for achieving long-term success.
Research reveals that top-performing stocks are unlikely to match their performance the following year
The study by Schroders found that, in 12 of the past 18 years, not a single US stock that was among the top 10 performers in one year also made the top 10 in the next.
In five of the six years in which a top 10 performer did make the list in the following year, only one company managed it. And in the other year, three did.
And it’s not only that they perform well but then fall short of their previous success – in fact, the average decline in ranking has been considerable.
In 14 of the 18 years studied, the average top 10 performer slipped to the bottom half of the performance rankings the following year. Indeed, they were more likely to be among the worst-performing stocks than the better ones.
The graph below shows the average ranking change among the top 10 performers on the MSCI USA index from the previous year.
Source: Schroders
As you can see, the average top performer slips considerably after reaching the heady heights of the top 10.
And these trends are not confined to the US.
The study also found that in 11 out of 18 years in both Japan and the UK, the average top 10 performer fell to the bottom half of the performance ranking in the next year. And in Germany, it happened in 14 of the last 18 years.
So, based on the key findings of the study, it is apt to repeat that past performance is not a reliable indicator of future results, as the evidence suggests.
Chasing performance is unlikely to lead to lasting success
As humans, we are susceptible to hype and noise, and everyone loves to back a winner. Investors are not immune to this, and following the herd is a typical bias that financial planners warn against.
As you just read, top-performing stocks are unlikely to replicate their success over the long term, so attempting to chase their gains is unlikely to be a sustainable strategy.
You may get lucky and land on that one top performer that manages to repeat its success over consecutive years, but the odds are against you.
When it comes to long-term success, the companies that excel are typically those that grow steadily rather than being the top performers in any single year.
A balanced portfolio built around long-term goals is usually a more reliable strategy for steady growth
Achieving long-term success in investing typically requires building a well-diversified portfolio with a mix of assets that align with your risk tolerance.
By spreading your investments across various asset classes, you minimise your exposure to the volatility of any single investment or sector. This balanced approach not only reduces risk but also increases the potential for steady returns over time.
Instead of trying to time the market or chase short-term trends, a diversified strategy allows you to benefit from different areas of growth while avoiding the pitfalls of market speculation.
Consistent, gradual growth over several years can compound into stronger overall returns, providing a more reliable path to wealth-building than the high-risk, high-reward strategy of chasing top performers.
Get in touch
Emotional biases may tempt you to follow the crowd and invest in the latest high-performing stocks, but the evidence suggests that this has not typically been a good strategy for success.
A financial planner can help you stay focused on your long-term goals and can work with you to build a well-diversified portfolio that aligns with your risk tolerance and financial objectives.
By guiding you through market volatility and helping you avoid impulsive decisions, they can ensure your investment strategy remains disciplined and on track for sustained and steady growth.
To speak to a financial planner, get in touch.
Email us at hello@vwmwealth.com or call us on 0141 229 4004.
Please note
This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
