November 16, 2022 by Ethan Gilbert
It’s human nature to prefer owning stocks that have performed well recently. But the reality is that returns tend to be cyclical and a decade of outperformance is usually followed by underperformance.
In the stock market, there are countless examples of this phenomenon: Large Cap US Stocks in the early 1970s (the nifty fifty), tech companies in the 90s, oil companies in the 2000s, and most recently, high-growth stocks and cryptocurrencies.
Most recently, the Dow Jones Industrial Average fell victim to chasing returns. On August 31st, 2022, Exxon Mobil was replaced by Salesforce in the Dow.
To traditionalists, it was a tragedy. Exxon Mobil was the oldest component of the Dow with its roots tracing back to 1928 when Standard Oil joined the Index.
But to younger investors, it was long overdue. Salesforce was a rising SaaS (software as a service) star and embodied the new American economy.
Most importantly, to investors who held funds that tracked the Dow, it was a disaster. In the 2 years and 77 days since that change, Salesforce has declined in value by 43%. Exxon Mobil meanwhile has appreciated 219%.
Markets are challenging because the last 90 years are a very good predictor of the next 30. But the next 10 years are often the opposite of the last 10. If you want to be greedy, be contrarian but most often the prudent action is to buy and hold a low-cost, well-diversified, portfolio. And of course, don’t chase the shiny object.