2020 was an unusual year for the global economy. Even more surprising was the impact of the economic consequences on the stock market. This was the year when expensive shares became even more expensive. Given the high unemployment rate and falling GDP, everyone expected the stock market to crash. However, markets bounced back and surpassed pre-pandemic levels. Professionals and amateurs alike were surprised by the dynamics of the stock market and the list of the most profitable stocks in the past year.
Why the stock market performed well
Before we move on to examining the most profitable stocks, let’s take a look at what was so special about the past year. Although the unemployment rate rose sharply to its highest level since the Great Depression, most white-collar jobs were unaffected. The ability to work from home has resulted in many jobs being saved. The use of technology to tackle the current crisis has also resulted in increased revenues for several years.
The Federal Reserve, Treasury, and Congress have worked together to provide incentive packages for various affected communities. While we can debate the speed and effectiveness of these measures, the data clearly showed that the vast majority of Americans could use funds to increase their net worth. V Personal savings rate reached a record level of 33%. According to data published New York Fed, total household debt declined in the second quarter of 2020, the first reduction since 2014.
Best Nasdaq Stocks for 2020
The list of the most profitable Nasdaq stocks shows how things have changed in our lives over the course of 2020.
Zoom became part of our everyday vocabulary as everyone started working from home and all activities were conducted virtually. The closure of gyms has led people to exercise at home using the Peloton. It took Moderna, using its mRNA technology, just six weeks to develop and manufacture the initial vaccine batches.
Any list of the most profitable stocks of 2020 would be incomplete without Tesla. In 2020, stocks have skyrocketed, capturing everyone’s imagination. The rise in stock prices made Elon Musk the richest man in the world, overtaking Jeff Bezos and Bill Gates.
| COMPANY | TICKER | PRICE CHANGE |
|---|---|---|
| Tesla Inc. | TSLA | 743% |
| Moderna Inc. | MRNA | 434% |
| Peloton | PTON | 434% |
| Enlarge video | ZM | 396% |
| Pinduoduo Inc. | PDD | 370% |
Best S&P 500 Stocks for 2020
When we look at the best performing stocks in the S&P 500, we again see Tesla at the top of the list. Tesla’s inclusion in the S&P 500 has been controversial. Tesla was by far the largest firm by market value to ever join the S&P 500.
Tesla’s inclusion in the S&P 500 has forced all index funds that track the S&P to buy tens of billions of dollars worth of Tesla shares to track the index as closely as possible. As a result, stocks skyrocketed in value, fulfilling a self-fulfilling prophecy.
Tesla’s impact on index inclusion was completely unexpected. Usually stocks are added at a much lower market cap and this does not have the same effect on the index. The S&P 500 committee requires a company to report accumulated earnings for four consecutive quarters. Tesla has only recently become profitable. However, the share price climbed much higher even before the company started to make a profit.
| COMPANY | TICKER | PRICE CHANGE |
|---|---|---|
| Tesla Inc. | TSLA | 743% |
| Etsy Inc. | ETSY | 302% |
| Nvidia Corp. | NVDA | 122% |
| PayPal Holdings Inc. | PYPL | 117% |
| L Brands Inc. | LB | 105% |
Best performing stocks based on lifetime wealth accumulation
According to SSRN Document “Are Shares Outperforming Treasury Bills?” Created by Bessembinder, ExxonMobil (Ticker: XOM) generated a staggering $ 1 trillion between 1926 and 2016. It was one of the best wealth creation machines of a lifetime. Undoubtedly, Exxon’s robust dividend payout to shareholders since 1882 has contributed to its outstanding performance. ExxonMobil has been part of the Dow since 1928 and rightfully earned its place through the creation of wealth over the generations.
The best promotions to buy now
It can be tempting to look at a list of the top performing stocks to extrapolate that their performance will continue. However, past performance does not indicate future performance. It is difficult to select individual promotions, even if they have been the most successful in the past.
Ironically, ExxonMobil was removed this year and replaced by Salesforce (ticker: CRM). The negative change in the WTI oil futures contract also did not help the ExxonMobil case.
If the fate of ExxonMobil hasn’t convinced you that stock picking is not a good idea, let’s delve deeper into Bessembinder’s research. He found that most of the common stocks that have appeared in the Center for Securities Price Research (CRSP) database since 1926 have buy-and-hold bond yields of less than one month.
Yes, you read that right. Holding most of the individual stocks would be a losing proposition, and you would be in a much better position to simply deposit that money in secure Treasury bonds.
If you’re wondering how to reconcile this lag with the evidence that stocks outperform Treasury bonds, the answer lies in a tiny subset of stocks. In terms of lifelong dollar wealth creation, the 4% of the most successful listed companies account for the net gains of the entire U.S. stock market since 1926.
Simply put, only a small fraction of listed stocks are responsible for creating most of the wealth in the general stock market. These are real players of the five. The rest of the stocks were real laggards.
The superiority of this tiny elite group of stocks is such that it compensates for the lag of most of the other stocks.
“The results confirm the importance of diversification, and low-cost index funds are a great way to diversify widely.” Hendrik Bessembinder, School of Business. V.P. Carey at Arizona State University
The Index Funds Advantage
Bessembinder’s study is a great example of why index funds are the best choice for everyone. It’s great to look at the most profitable stocks and dream of choosing the next Tesla or Amazon. However, it is difficult to determine the winners in advance.
The best alternative to finding a needle in a haystack is to buy the entire haystack. Looking back at Tesla, no one expected the company to survive or even reach its current valuation levels.
I have a small set of fun portfolios to use for quick investment to select individual stocks. But my destiny for my moon shots is that even if it gets to zero, I’ll be fine. Determine your risk tolerance and stick to your investment plan without being influenced by the top performing stocks, because the best stocks of the past year may fall in value tomorrow.
Most of my capital is concentrated in diversified low cost ETFs. Instead of trying to calculate the market and determine when is the best time to buy or sell stocks, I just automatically invest. My asset allocation has been determined and my investment platform periodically invests my funds and automatically rebalances as needed for free.
I understand why viewing stock indices at all-time highs can make you nervous. However, sitting cash is not a winning strategy. As 2020 has shown, you can analyze all economic indicators and conclude that we must be in a recession. However, stocks can move higher and higher.
If the volatility of the stock markets makes you nervous, the best course of action is to study your asset allocation. Determine the asset allocation between stocks and fixed income. Run numbers using best retirement calculators figure out when to retire and how much you need.
If you are looking to reduce your investment in stocks due to volatility and your bond portfolio does not provide returns, look for asset-backed securities that offer higher returns, such as farmland investment… While you don’t get the security of US Treasury securities, you get higher returns.
Final thoughts on top promotions
It is difficult to analyze a list of the most profitable stocks to determine if they will continue to dominate. While momentum and trends have persisted for some time, using these factors to justify your investment doesn’t always work.
We’ve seen one of the richest companies in history like ExxonMobil go out of style recently as well.
A smart course of action is to channel the bulk of your portfolio to boring cheap index funds that track the market. Have a fun little portfolio if you want to pick out individual names, but be prepared to lose all value. And if the volatility of investing in the stock markets makes you nervous, then invest a portion of your portfolio in solid, asset-backed securities.
This article originally appeared on Your Money Geek and has been republished with permission.