It is common advice to simply invest in a low-cost mutual fund or ETF for the S&P 500 index or perhaps for the whole market. Warren Buffet says "I do not think the average person can pick stocks." Certainly it makes the most sense for many people to simply pick standard index funds for their 401(k), for example.
But what about the "better than average" investor? Yes, I know that it may be presumptuous to assume that I could do better than professional fund managers, but it seems that it shouldn't be difficult to find companies within the S&P 500 that beat the average more often than not.
To test this idea, I took a look at the S&P 100 (not the full 500) and how each company did compared to the average over the past 10 years. I picked the companies that consistently beat the average over the full 10 years, 5 years and 3 years. Using a similar weighting as the index itself, I came up with the following portfolio of 20 stocks:
- Communication Services: GOOG, DIS, NFLX
- Consumer Discretionary: AMZN, TSLA, NKE, HD
- Consumer Staples: TGT, COST
- Financials: MA, V
- Health Care: UNH, DHR, TMO
- Information Technology: AAPL, MSFT, NVDA, ADBE
- Industrials: HON, UNP
I did not choose any companies from the Utilities, Materials, Real Estate or Energy sectors, but collectively these entire sectors comprise 10.1% of the S&P 500.
This portfolio would have performed significantly better than the index over the past 10 years. Even if you remove TSLA, the returns are about 3x over the index.
These are all well-known companies, many of whose products or services I use on a regular basis. I know that "past performance is no guarantee of future results", but it seems to me that that these high performing companies are more likely to continue to beat the average than not.
For an investor that is willing to keep an eye on their portfolio and make changes when necessary, instead of forgetting about it for 10 years, why wouldn't a bucket of stocks like this be a better choice than an index fund? Why should we settle for the average instead of going with companies that are consistently better than average?
Submitted May 04, 2021 at 01:03AM by andrwsc https://ift.tt/3egitWl
