Well, it’s that time of year again.  It’s time for the annual lists of top performing stocks, mutual funds, and ETFs of 2009.  Since it’s the end of the 2000’s we also see lists like “The 11 Best Performing Stocks of the 2000’s“.

For many investors, it will be tempting to “chase performance” and buy last year’s winners or the hot performers of the last decade.

Bad idea!

Here’s why:

Often the best performing stocks from last year will be this year’s losers.  It also works the other way….last year’s losers often turn out to be this years winners.

As Bespoke Investment Group brilliantly points out, the worst stocks of 2008 have become the best stocks of 2009.

  • the 50 stocks in the S&P 500 that did the worst in 2008 are up an average of 101% in 2009!
  • The 50 stocks that did the best in 2008 are up an average of just 9% in 2009.

2009 was definitely a year when buying last year’s losers worked and buying last year’s winners failed.  However, I can guarantee you that it won’t always work that way.  You should never base your investment strategy simply on last year’s performance.

By the way, I hope you didn’t buy Medifast (MED) at the beginning of this year just because it was the best stock of the last decade.  As of 1:30pm on Tuesday it was down 30% for the year-to-date.

Don’t chase performance!

Graph by Bespoke Investment Group