New data reveals why chasing “star players” on the stock market could be detrimental to your wealth

Financial headlines are often full of stories about “star performers” on the stock market.

But one thing the headlines can’t say with certainty is how long the stocks they’re reporting on might continue to outperform. Now, a study has revealed that the top 10 stocks in each given year rarely remain in the top 10 for the following year.

This shows that chasing star performers on the stock market could be detrimental to your long-term wealth accumulation. Read on to learn more about the findings of the study and why a balanced portfolio invested over the long term may be a more sensible strategy for working towards your financial goals.

New data has shown that the companies in the top 10 stock market performers rarely maintain their position for more than a year

Schroders has found that, in 12 of the 18 years up to 2022, none of the US stocks that appeared in the top 10 performers remained in the top 10 the following year. In one of the 18 years, three managed to remain in the top 10 the following year, and in five, only one stock remained in the top 10 in the next 12-month period.

The findings were similar for the top 100 stock market performers in the US over the same time period. The study found that, on average, just 15 companies managed to remain in the top 100 for two consecutive years. And the data was consistent in other markets across the world, including the UK, Japan, and Germany.

What’s even more interesting is that the drop in value for companies that fell out of the top 10 or top 100 was significant. In 14 of the 18 years studied, stocks that had been in the top 10 in one year fell to the bottom half of the rankings in the following year. Indeed, they were more likely to be among the worst-performing stocks the following year than among the better-performing ones.

Though it may feel exciting to invest in the “winners”, remember that star players rarely continue to outperform from 1 year to the next

The findings of the Schroders report are important for understanding why we don’t recommend attempting to pick the best-performing stocks for your portfolio each year.

If you or your planner were to base your investment decisions on which stocks are performing best at any given time, chances are you could lose money on them within a year. This is partly because the top performers sometimes become overvalued due to hype.

As more people invest in them, expectations grow. So, if the company behind the stock fails to live up to these expectations and underperforms in the following year, the value of the stock can fall quickly.

This means that choosing to invest your money in stocks based purely on their performance could put your wealth at risk, because the chances are the stocks could soon fall in value. The initial excitement you may have felt when investing in a stock that was outperforming at the time could soon turn to panic, fear, or despair if the stock’s value – and consequently, the value of your investment – falls.

A balanced portfolio can help you mitigate risk and give you the opportunity to grow your wealth steadily over the long term

As you’ve read above, choosing stocks based purely on their current performance is usually a risky strategy that could be detrimental to your wealth.

Instead, we usually recommend creating a balanced portfolio that is aligned with your personal circumstances and long-term goals, not to mention your attitude to risk. By balancing your portfolio with a range of carefully selected asset classes, locations, and sectors, you may be able to mitigate the impact if any of your investments underperform in a given year.

Your planner will use the questionnaire you completed when you began working with us to understand how to balance your portfolio appropriately for your needs. As a result, your portfolio will contain investments that align most closely with your goals and your attitude to risk, rather than relying on speculation about which stocks might perform well.

At your annual reviews, your planner can show you the progress you’ve made towards your goals. They can also ensure that your portfolio continues to offer your wealth the opportunity to grow, so that you have the greatest chance to achieve your financial goals within the time frame you’ve set.

Get in touch

To learn more about how our team can help you balance your investments to give your wealth the greatest chance to grow, please get in touch. Email us at info@harperlees.co.uk or call 01277 350560 to find out more and we’ll be very happy to speak to you.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investments (and any income from them) 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.

Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.