Stock performance by decade
Analyzing current constituents of the major indices
The challenge with stocks is that past performance is no guarantee of future returns. We see good companies that go up a lot and we might buy them in the hopes they will keep going up. Consistent and persistent performance is important.
That’s not just an issue for people buying stocks. It’s also a problem for the smart people who try to make indices based on a basket of good companies that represent the overall market. They don’t want to have companies that are total duds.
Taking stocks currently in the Dow 30, S&P 500, and Nasdaq 100, comparing their average quarterly return to the average quarterly return of the overall market (using the S&P 500), then comparing the last two decades, we can see if stock performance persisted over two long time periods for this sample:
The first thing that should be suspect here is that there are very few underperformers. That’s because, this is a heavily bias group. We took the stocks in those major indices as of today (that had 20 years of history), not the stocks from ten or twenty years ago. We have the survivors. We can see this phenomenon more clearly by categorizing the four quadrants of decade-by-decade performance:
For 55% of the stocks, they outperformed the broader market on a simple quarterly average over the 2000-2010 period and did it again over the 2010-2020 period. The vast remainder did well that first decade but not this most recent decade. But, beyond that, you have very few stocks that did poorly in 2000-2010 that are still in these major indices today. They don’t let weak performers hang around.
If you are looking to invest in good companies, you can at least trust that these constituents have been thoroughly vetted by a bunch of smart people. It’s never a risk-free bet to invest but the major indices are certainly a good place to start if you want consistent and, more importantly, persistent performers (from a historical perspective). Or, just take the easy approach and find a good broad-market fund that’ll do the work of culling duds and keeping winners for you.
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