By John Wasik
CHICAGO Dec 23 This year, the stock market has
been glowing as brightly as the seasonal lights that now bedeck
But if you want your investments to keep doing well in 2014,
look away from the shiny stuff. If the winners of 2013 follow
historical patterns, they won't sustain their market-beating
performances next year.
Consider the most stellar performer of 2012.
As housing rebounded, the iShares U.S. Home Construction ETF
was the place to be in 2012. It led the pack with a nearly 80
percent return for the year, as companies like PulteGroup Inc.
, Lennar Corp. and D.R. Horton, Inc. made up for
time and big money lost to the housing crisis.
This year, the housing market was even stronger than it was
in 2012, but investors in the iShares ETF didn't share the
The hot, institutional money had moved onto other sectors
and the fund returned 11 percent to investors through Dec. 20 -
less than one-third of the 36-percent returns investors in
consumer cyclical stocks saw, according to Morningstar.
It's not just skittish sector funds that fail to follow big
years with more big years.
Let's look at an entire country: The EGShares India Consumer
ETF represents a slice of the second-most populous country on
the planet and one that's moving toward growing a solid middle
class. Last year, the fund grew nearly 52 percent, placing it in
the top tier of all ETFs. For the past year, though, this fund
is down nearly 10 percent through Dec. 20.
While there are a handful of exceptions, the general rule is
that repeat performance is a fickle beast. You can't expect a
fund to consistently echo its best year; it's a statistical
NO REPEAT PERFORMANCE
One of the best regular benchmarks for fund performance is
the S&P Dow Jones Indices' Persistence Scorecard, which
McGraw-Hill Financial issues twice a year after it researches
fund records over several annual periods.
Through September of this year, S&P found that only 19
percent of large-company funds, 20 percent of mid-sized company
funds and 27 percent of small-cap funds held their top-half
performance rankings over three-consecutive three-year periods.
That means up to 80 percent of top-performing funds couldn't
repeat their great returns.
Over a half-decade - five consecutive annual periods - the
persistence shortfall is even worse: Only about 8 percent of
large-cap funds, less than 1 percent of mid caps and about 10
percent of small caps were repeaters in the top ranks.
Even if you were to buy and hold the top performers over
five years, it's highly unlikely that they'd ever be winners
again. It's the equivalent of playing the same "winning" number
on a roulette wheel. Unless luck or chance intervenes, you'll
come out a loser.
How do you avoid performance chasing? Buy index funds to
hold large baskets of stocks and bonds instead of making more
A fund such as the iShares Core S&P Total U.S. Stock Market
ETF represents some 1,500 stocks. It's up nearly 30 percent for
the year through Dec. 20 and has averaged 18 percent over the
That handily beats the current returns of the two top
performers of last year and it only charges .07 percent annually
for management - a fraction of the fees typically charged on
more specialized funds. It holds mega-cap stocks like Apple Inc.
, Exxon Mobil Corp. and Google Inc..
To get your head around the concept of consistently holding
most of the market long term, keeping in mind you can still have
losing years, you'll have to accept that it's nearly impossible
to guess which stocks and sectors are going to outperform in any
given year. This is not a leap of faith; it's a leap of ego.