How to Score a Winning Portfolio in 2020
Want to beat the market in 2020?
Don’t try to look for winning stocks.
I realize that sounds completely backward.
But the surprising truth is that in tricky market environments like the one we’re in now, the key to building a long-term winning portfolio usually doesn’t come from finding the absolute biggest wins. Instead, it comes from avoiding the biggest losers!
Investing is a tennis match.
In amateur tennis, 80% of points are lost, not won. They come from unforced errors like hitting a ball out of bounds.
If you’re constantly trying to smash the ball so that it’s unreturnable, you’ll wind up hitting the net or blasting the ball out of bounds. And you’re probably going to lose the match.
Not all games work like that.
But investing does — at least in environments like we’re in now, where risk is higher than normal.
How do you avoid losers? You buy what’s working.
Looking at similar environments to the one we’re in now — that is, months following a 25% or greater drawdown in the S&P 500 — owning what’s already been working has dramatically boosted the odds of making money going forward.
Stocks that have done well for the last six months are 50% more likely to wind up profitable a month later versus those that have underperformed.
But even I was surprised by the reason why this strategy works so well…
Owning what’s working does a better job of selecting winners, but almost more importantly, it does an incredible job of disqualifying losers.
Over the last three decades, avoiding stocks with negative six-month performance steers you clear of 97% of the names that shed 10% or more in the following month!
Just eliminating that junk means you’re in a drastically better position to outperform the market than you would be otherwise.
So what should you be focusing on? Tech, of course!
The tech sector continues to be the best-performing pocket of the stock market.
That means owning tech stocks is the smartest way to steer clear of the market’s biggest losers a month or two from now.
I’ve been pounding the table about buying what’s working for months now in these virtual pages. And the early results are strong…
The three names I gave you back in April, Nvidia (NASDAQ: NVDA), Amazon (NASDAQ: AMZN) and Microsoft (NASDAQ: MSFT), are up almost 34% on average in the two months and change since we started talking about this strategy.
Here’s how that basket of “what’s working” has fared against the S&P 500 since then:
That’s more than double the return — of the best quarter for the S&P since 1987!
Just by avoiding the worst stocks. Keep on buying what’s working in 2020 to stay a step ahead of this crazy market.
Jonas Elmerraji, CMT