2020 will be remembered as a strange year for the global economy. The impact of the economic collapse on the stock exchange has been even more surprising.
In the year 2000, expensive stocks became even more expensive. Everyone expected the stock markets to crash due to the high unemployment and fall in GDP.
The markets have recovered and are now higher than they were before the pandemic. Both professionals and amateurs were surprised by the performance of the stock market and the top-performing stocks in the past year.
Table of Contents
Why did the stock market perform well?
The Nasdaq’s Best Stocks for 2020
The Best Stocks of S&P 500 in 2020
The Best Stocks Based on Lifetime Wealth Creation
The Best Stocks to Buy Now
Advantage of Index Funds
Last Thoughts on Best-Performing Stocks
Why did the stock market perform well?
Let’s first understand why the past year was so different. While the unemployment rate soared to its highest level since the Great Depression, white-collar employment was unaffected.
Many jobs were saved because of the ability to work at home. Technology was used to help solve the current economic crisis, which resulted in a significant increase in earnings.
The Federal Reserve, Treasury and Congress collaborated to create stimulus packages for various communities. Although we may debate the effectiveness and speed of these measures, data clearly shows that most Americans can use the money to increase their net worth.
The Personal Savings Rate reached a record high of 33 %. According to the N.Y. Fed data, the total household debt declined in Q2 2020. This is the first decrease since 2014.
FRED graph on personal saving rate.
The Nasdaq’s Best Stocks for 2020
The Nasdaq top-performing stock list reflects how our lives have changed during 2020.
Zoom has become a part of our daily vocabulary, as we all started to work from home and conduct events virtually. Peloton was used by people to work out at home after gyms closed.
Moderna’s mRNA-based technology allowed them to create and manufacture the first lots of their vaccine in just six weeks.
Tesla is a must-have on any list of the best performing stocks in 2020. Tesla’s stock price rose dramatically in 2020 and captured everyone’s attention. Elon Musk became the richest person in the world after his stock price increased, surpassing Jeff Bezos.
COMPANY TICKER PRICES CHANGE
Tesla Inc. TSLA 743%
Moderna Inc.MRNA434%
Peloton PTON 434
Zoom Video ZM 396
Pinduoduo Inc.PDD370%
The Nasdaq’s Best Stocks for 2020
The Best Stocks of S&P 500 in 2020
Tesla is again at the top when we examine the S&P 500’s best-performing stock list. Tesla’s inclusion in the S&P 500 wasn’t without controversy. Tesla was by far the largest company ever in terms of market value to be included in the S&P 500.
Tesla’s inclusion into the S&P 500 forced index funds to buy tens billions of dollars in Tesla stock to follow the index as closely and as accurately as possible. The stock price soared as a result.
Tesla’s impact was an outlier. Stocks are usually added to the index at lower market caps, so their impact on the index is not as great.
According to the S&P 500 Committee rules, a business must report a cumulative profit for four consecutive quarters. Tesla only recently became profitable. The stock price was much higher before Tesla started to make money.
TICKER PRICE CHANGE AT COMPANY
Tesla Inc. TSLA 743%
Etsy Inc.
Nvidia Corp. NVDA 12%
PayPal Holdings Inc. PYPL 117 %
L Brands Inc. LB 10%
The Best Stocks to Buy Based on Lifetime Wealth Creation
According to Bessembinder’s SSRN article “Do Stocks outperform Treasury Bills?” ExxonMobil created a staggering $1 trillion of wealth between 1926-2016.
This is one of the most effective lifetime wealth accumulation machines.
Exxon’s consistent dividend, which has been paid to shareholders since 1882, has undoubtedly contributed to its impressive performance. ExxonMobil is a Dow component since 1928, and it has earned its place in the wealth creation of generations.
Chart of the best performing stocks
The Best Stocks to Buy Now
You might be tempted to assume that the best performing stocks will continue to perform well by looking at their list.
Past performance does not necessarily predict future performance. Even if the stocks have had the best performance in the past, picking individual stocks can be difficult.
Salesforce (Ticker CRM) replaced ExxonMobil this year. ExxonMobil also suffered from the WTI futures contract going negative.
Bessembinder’s research will help you understand why stock picking is a bad idea.
The average lifetime return on investment for most stocks in the Center for Research in Security Prices database (CRSP) since 1926 is less than one month’s Treasury.
You read it correctly. You would lose money if you held the majority of stocks. Instead, put that money into safe and secure Treasury.
You can reconcile the underperformance of stocks with the fact that they outperform Treasury bonds by looking at a small subset.
In terms of dollar wealth created over a lifetime, the top 4% of companies listed explain the net gain of the U.S. Stock Market since 1926.
Simple: Only a small number of stocks are responsible for the majority of wealth creation on the stock market. These are the true A+ players. Other stocks were real laggards.
This small elite group of stocks outperforms most other stocks, compensating for their underperformance.
Hendrik Bessembinder from Arizona State University’s W. P. Carey School of Business
Advantage of Index Funds
Bessembinder’s study is a great example of why index fund are the best choice for everyone. It’s fun to dream about picking the next Amazon or Tesla by looking at the top-performing stocks. It is difficult to predict the winners.
It is better to purchase the whole haystack than to search for the needle. Tesla was a surprise to many. No one could have predicted that the company would even survive, let alone reach its current valuation.
I use a small amount of my fun portfolio to invest in individual stocks. My moonshots are allocated in a way that I am fine even if they go to zero.
Do not let the top performing stocks of the past year influence your decision. They could lose value tomorrow.
The majority of my networth is invested in index funds that are low-cost and diversified. Instead of trying time the market to determine when it’s a good time to buy or to sell stocks, I use auto-investment.
My investment platform invests and rebalances my money automatically and periodically, free of charge.
I can understand that looking at stock indices on a record high could make you feel nervous. Sitting in cash, however, is not the best strategy. You can look at all economic indicators, and as 2020 demonstrated, conclude that the economy is in recession. Stocks could continue to rise.
You should examine your asset allocation if the volatility in the stock market makes you nervous. Define your asset mix between stocks and fixed income.
Calculate your retirement needs and when you can retire using the best retirement tools.
Farmland investment is a good option if you are looking to reduce your stock portfolio due to the volatility, but bond portfolios do not offer returns. You may not have the same safety as U.S.> Treasury bonds, but you will get higher returns.
Last Thoughts on Best-Performing Stocks
It is difficult to predict if the best-performing stocks will continue to outperform. Although trends and momentum persist for some time, relying on them to make an investment is not always successful.
ExxonMobil is one of the most wealth-creating companies in history.
It is prudent to invest the majority of your portfolio in low-cost indexes that follow the market. If you are looking to invest in individual stocks, then a fun and small portfolio is the way to go. But be prepared to lose your entire investment.
If the volatility in the stock market makes you nervous, invest part of your portfolio into hard, tangible assets-backed securities.
This article was originally published on Your Money Geek. It has been republished by permission.
