If you have ever done any investing at all, you’ve no doubt seen that warning: “Past performance is not a guarantee of future results.” The investment companies are required by law to remind you of that. Sort of like that warning on cigarette packs that this stuff is dangerous. You probably hurriedly read that investment warning and maybe agreed with it on a subconscious level. But do we really believe it? Or phrased another way, do we practice it?
The evidence is that we don’t believe it. Investors tend to pile into stocks that have done well recently on the theory that what goes up must keep going up. They disregard that old maxim that “what goes up must come down!” On the flip side, investors also tend to sell out on stocks that are headed downward, often selling out at just the wrong time.
A good example of this is the FAANG stocks. FAANG stands for Facebook, Apple, Amazon, Netflix and Google. Google’s parent company is actually Alphabet, but FAANA just doesn’t sound as good as FAANG!
In recent years those FAANG stocks have been on fire. Over the decade 2012 to 2021, the FAANG stocks averaged a return of 28 percent a year. To put that in perspective, the long run return on stocks averages 10 percent per year. Returns like that attract new investors like bugs to a night light! And lots of folks piled in. But remember, past performance is not a guarantee of future results.
As the COVID pandemic began to subside, the luster of some technology stocks that benefitted from a stay-at-home society began to fade. So far in 2022, the FAANG stocks are down 36 percent, compared to a 16 percent drop in the S&P 500. That certainly takes a bite out of your portfolio! Now if you participated in 10 years of 28 percent returns, you’re probably OK with being down 36 percent this year. But if you bought into the FAANG group in the middle of 2021, you may feel like you need to wear a neck brace from the whiplash. Netflix alone is down 69 percent this year.
If you tend to get a little nervous when markets go down, you’re not alone. Going back over my work career, we’ve had major market corrections in 1973-74, 1987, 2000-2002, 2008 and 2020. Each one created some anxiety among investors. But after each correction, what are the odds that the market comes back and then goes on to even higher levels?
Well, so far in the U.S. at least, the odds are 100 percent. That’s right. After each correction, the market recovers and then goes on to higher levels. Those are pretty good odds.
Of course, I probably should remind you that past performance is not a guarantee of future results!
Dr. David Ashby is a Certified Financial Planner and the retired Peoples Bank Professor of Finance at Southern Arkansas University. He holds degrees in accounting and business administration and a doctorate in finance from Louisiana Tech.