Is buying the best 5-year performers a good strategy?
— -- Q: Buying last year's top stocks and ETFs isn't a great bet. But what about buying the best ones over the previous five years?
A: Investors love to root for, and bet on, the winners.
Lists showing the best stocks each year are like red meat for investors hungry for decent returns. It's so tempting to find the stocks that were the best last year, and jump on. However, as Ask Matt readers found out, last year's winners among stocks and exchange-traded funds are rarely the winners the following year.
But you ask a valid follow-up question. It's easy to see how perhaps last year's winners were just one-year wonders. Would investors be better served, instead, looking for the stocks and ETFs with the best five-year track records and betting on them instead?
Good theory, but again, it's not true based on recent data. Looking at the best stocks and ETFs over the past five years, it's clear that they haven't delivered great results for investors, either, in the sixth year.
Let's start the analysis with stocks. The ten best stocks between Dec. 31, 2005 and Dec. 31, 2010, among the current Standard & Poor's 500 index, delivered some remarkable returns. As a group, they gained a staggering 546% during those five years.
However, in the sixth year, 2011 so far, six of the 10 are down and down big in some cases. While these stocks might turn around by the end of the year, so far most of their winning ways have faded.
Below are the ten best stocks between 2005 and 2010 and their 5-year performance and the year to date change in 2011:
• Priceline (PCLN): 1,691%, 26.4%
• CF Industries (CF): 786%, 16.8%
• Netflix (NFLX): 549%, -56.0%
• Mosaic (MOS): 422%, -24.3%
• Cummins (CMI): 390%, -14.7%
• F5 Networks (FFIV): 355%, -31.8%
• Apple (AAPL): 349%, 23.3%
• FMC Technologies (FTI): 314%, 1.2%
• Salesforce.com (CRM): 312%, -1.9%
• Edwards Lifesciences (EW): 289%, -9.8%
(Sources: Standard & Poor's Capital IQ, USA TODAY research, excludes dividends.)
What about ETF's?
If the best stocks of the past five years aren't necessarily winners in year 6, what about ETFs? Since these investments are diversified, wouldn't they keep their momentum going?
History says, no. In fact, past performance is even less predictive of future success with ETFs. All ten of the best mainstream ETFs, based on the list of free ETFs from TD Ameritrade selected by Morningstar Association, between 2005 and 2010 are down in 2011 so far. Again, perhaps these ETFs will turn around by year end, but so far, the trend hasn't been friendly to investors.
Below are the ten best ETF between 2005 and 2010 and their 5-year performance and the year to date change in 2011:
• iShares MSCI Brazil (EWZ): 132%, -29.2%
• iShares S&P Latin America 40 (ILF): 119%, -24.7%
• iShares FTSE China 25 (FXI): 110%, -27.0%
• Vanguard MSCI Emerging Markets (VWO): 58.2%, -22.2%
• iShares MSCI Canada (EWC): 42%, -15.5%
• iShares MSCI Australia (EWA): 35%, -16.3%
• Vanguard Small Cap Growth (VBK): 34%, -10.2%
• iShares Russell 2000 Growth (IWO): 26%, -11.9%
• iShares S&P MidCap 400 (IJH): 23%, -10.7%
• Vanguard Small-Cap (VB): 22%, -11.8%
(Sources: Standard & Poor's Capital IQ, USA TODAY research, TD Ameritrade, Morningstar Association, excludes dividends.)
So as you can see, the strategy of jumping onto winners doesn't work much better, even if you go back five years. The data provide further proof of just how poor recent history in guiding an investment strategy.
Matt Krantz is a financial markets reporter at USA TODAY and author of Investing Online for Dummies and Fundamental Analysis for Dummies. He answers a different reader question every weekday in his Ask Matt column at money.usatoday.com. To submit a question, e-mail Matt at mkrantz@usatoday.com. Follow Matt on Twitter at: twitter.com/mattkrantz
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