Everyone knows the old investing slogans, “let your winners run” and “the trend is your friend” and these are well known because they have proven themselves over time to be true. In fact, Sam Stovall in his book, The Seven Rules of Wall Street, points out that it has been a sound investing strategy to invest in the industries and sectors that had the best performance the prior year and to avoid those with the worst.
In fact, the “let your winners run” philosophy outperformed the broad market more than 70% of the time over the years between 1970 and 2007 described in Stovall’s book. (Seven Rules of Wall Street: Crash Tested Strategies That Beat the Market)
Of course, during bear markets all bets are off, but the following exchange traded funds were the big winners in 2010 and it will be interesting to see if “let your winners run” proves to be viable again this year:
Top 5 Exchange Traded Funds for 2010
1) iShares Silver Trust (NYSE:SLV): +82.5%
2) iShares MSCI Malaysia Index (NYSE:EWM): +35.4%
3) SPDR Gold Trust (NYSE:GLD): +29.3%
4) iPath Dow Jones-AIG Copper Total Return Sub-Index (NYSE:JJC): +29.4%
5) iShares MSCI South Korea Index (NYSE:EWY): +28.4%
The interesting elements of this discussion are twofold.
First, looking back at 2010 we see strength centered in metals and Asia which of course were making headlines all year.
Secondly, conventional wisdom says you should buy low, sell high, and sell last year’s winners because they’re unlikely to be winners this year; but in fact, the evidence points to the fact that winners tend to remain winners because they have momentum working for them, and this seems to be particularly true during this time of intense volatility and government intervention in equities markets around the world.
It’s quite possible that last year’s winners could be this year’s stars. However, in our volatile times, if the trend changes or momentum runs out on these winners, the outcomes could be much different. Therefore, my watchwords for 2011 will be “the trend is your friend until it isn’t” and “let your winners run until they fall.”
Disclosure: Wall Street Sector Selector actively trades a wide range of exchange traded funds and positions can change at any time.
John Nyaradi is the author of Super Sectors: How To Outsmart the Markets Using Sector Rotation and ETFs.
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