The Investment U E-Letter: Issue # 377
Monday, October 11, 2004

Best Performing Stocks – The Best and the Worst Over the Last Five Years
By Dr. Steve Sjuggerud, President, Investment U

Five years ago, Mom and Pop America thought it was simple

You buy and hold, forever. And what do you buy and hold? That’s easy, too You simply thumb through the pages of Money magazine, or Morningstar’s mutual fund guides, and you pick out the best performing stocks with the highest returns over the last five years.

Mom and Pop America thought they had done their homework well. They selected the best performing stocks over the previous five years, not realizing that no matter how little you knew, and no matter what you did, you couldn’t NOT make money in stocks in the last five years of the 1990s (I know, Mom, that’s not proper English.)

Far from getting the rewards they were expecting (after all, they did their homework), Mom and Pop America were punished – losing gobs of money. In the last (almost) five years since January 2000, you couldn’t make money in stocks if your life depended on it.

What’s it going to be for the next five years?

Since most people have their financial assets in stocks, bonds and cash, I thought we ought to take a quick moment to size up what’s done well over the last five years and what’s done poorly in these classes, and why. Then we can attempt to come to some conclusions about the future and where we might see good returns for the next five years

The Best Performing Stocks… and The Least Performing

The major stock market indexes don’t reflect the true beating that most people’s accounts have taken over the last five years. Sure, the Dow Industrials, the S&P 500 and the Nasdaq are all down for the last five years.

And it hasn’t just been U.S. stocks that aren’t performing. The MSCI World Index (minus the U.S.) is also down. But judging by the major indexes, the losses (outside of the Nasdaq) haven’t been huge. Here are the specifics:

Five-Year Annualized Performance (Through September 30, 2004)

• 0.5% Dow Industrials
• 1.3% S&P 500 (With Dividends)
• 7.1% Nasdaq
• 0.1% MSCI World Index (Excluding the U.S.)

Things get a bit more interesting when you look at investing styles For example, the Russell 2000 Growth Index (an index of smaller growth stocks) was down -0.7% annualized for the last five years, while the Russell 2000 Value Index was actually up by 14.7% a year. Small value stocks were the best performing stocks and the place to be.

But picking the gems would have been very tough. As I often say, a rising tide raises all ships and vice versa. The tide was going out for stocks. It was a tough time to make money.

Bonds Killed Stocks – But Which Ones Did Best?

Bonds beat stocks by a pretty wide margin over the last five years.

Take a look at the performance of Merrill Lynch’s “master” indexes, covering a wide range of bonds and bond maturities in just a few indexes:

Five-Year Annualized Performance (Through September 30, 2004)

• 6.6% High Yield (Junk) Bonds
• 8.4% Corporate Bonds
• 7.2% Government Bonds

The very best performing sector of bonds over the last five years has been inflation-indexed bonds, up an annualized 10.4% a year over the last five years.

Bonds were the place to be, of the major financial asset classes – although, as usually happens, nobody we know owned a major stake in bonds over the last five years.

Investors Could See a Return to the 1970s

So where to from here? Ha This is where it gets interesting

Five years ago, the mutual fund companies were touting their five-year track records, and telling you to buy and hold their mutual funds forever. You don’t see them doing this right now.

They wanted you to believe that the previous five years would somehow be the same as the next five years. Boy, were they wrong. If they were pitching that today, they’d tell you that stocks will lose money for five years, and that inflation-indexed bonds will make you 10% a year.

To me the interesting part is, where things have been is largely irrelevant. Where they’re going is what matters. So don’t pay so much attention to where things have been. The last 10 years should be a great lesson that the returns of the previous five years are no guarantee of the next five years.

So where are things going for the next five years? I think that the investments that did well in the mid-1970s will see their day in the sun once again. For more on this, check out the Crib Sheet, below.

Today’s IU Cribsheet

• I talked about what investments could be the best performing stocks over the NEXT five years in the September 23, 2004 Investment U E-Letter: Investment Performance: 11 Investments That Could Beat Stocks Until 2009.

Good investing,

Steve

P.S. ELECTION FUTURES UPDATE: KERRY COMES BACK In the Iowa Electronic Futures market, where real money is on the line, the futures market is now giving Bush a 55% chance of winning, and Kerry 45% chance. This is a big change from September 25 readings of Bush 67% chance, Kerry 33% chance. To read my original piece on this, see #374 – Bush Will Win It.

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