It was a great year to be a stock picker.
If you picked a handful of random stocks each year on January 1st, weighted them equally in a portfolio, and then remained invested in those stocks until the end of the year, you’d find yourself underperforming index returns most of the time. It’s one of the best-known secrets of investing: a small group of stocks have generated most of the returns for US investors over the last century or more. That’s part of what’s made index investing so popular. Buying all the stocks ensures you’ll own the few on the fat tail of the distribution curve, and history has shown those great returns are enough to offset the detriment of also owning the laggards.
2022 has been an exception to the rule. More individual stocks are outperforming the index than in any year since 2009.
It’s a sharp divergence from the last few years – most notably 2020 – where calendar year returns were especially dominated by a handful of names. You’ve probably heard of some of those big winners from 2017 -2021. Apple. Amazon. Microsoft. Alphabet. The biggest stocks (which of course are the largest components in market cap-weighted indexes like the S&P 500) dragged indexes higher, while many non-growth stocks languished. In 2022 it’s been the opposite. Value and safety sectors like Energy, Industrials, Health Care and Consumer Staples have led the way. Mega cap tech, on the other hand, has been punished. That’s helped 58% of S&P 500 stocks to post better returns year-to-date than the index’s 19% decline.Continue reading “A Good Time to Pick Stocks”