If you’ll remember: The last time I bought stocks back in January, I noticed that each of the major financial websites had their own “analyst opinion” section that is supposed to tell you how the stock is going to do over the next 12 months. Even though I buy my stocks based on qualities like long-term earnings forecasts, dividend yields, PE ratios, and a few others, for fun I decided to write down all the expert opinions and monitor them over the next 12 months.
Will one of these financial media sites be able to predict the right stock performance for all 10? Will any of them be able to pick a stock portfolio that beats the portfolio I put together or even the S&P 500 index? Let’s read on to see how we’re doing at our nine-month check-in.
The Stock Picking Experiment:
The four major financial websites where I collected analyst opinions from were:
- CNN Money
- Yahoo Finance
- MSN Money
- Fidelity
Because each of their analyst recommendations has their own unique scale (i.e. some have a 1-5 scale or 1-10 scale), I decided to communize them all by creating a simple 4-class color-coded ranking system. Green and orange were recommendations that the stock was a good purchase while yellow and red were both signals that the stock would be a poor choice.
Portfolio Performance:
As of November 13 here is how our portfolio performed:
So far the best performing stock out the group is Johnson & Johnson with a 23.4% increase! 3 out of the 4 experts predicted this.
The worst performing stock in the group is AFLAC Inc with a modest 5.95% loss. Unfortunately all 4 of the financial sites got this one wrong.
Which Expert Got the Most Right?
Which website’s expert opinions are in the lead so far with the most positive predictions?
- Both Yahoo and MSN are in the lead with 9 out of 10 correct predictions.
- CNN is in second place with 6 out of 10.
- Fidelity unfortunately made the most misjudgments about the stock performances with only 5 out of 10 right so far.
Expert Portfolio Performance:
While that’s one way to look at this, let’s take this from a different perspective.
Suppose I had selected my 10 stocks the way I normally do and then consulted the big financial websites to see whether or not their experts approved. THEN what if I had only bought the stocks they recommended (i.e. if only 5 of them had been good purchases, then I only bought 5 out of the 10). If I had done that, here is how things would have worked out so far:
My portfolio return 9.4% versus:
- CNN: 5.9%
- Yahoo: 9.4%
- MSN: 9.4%
- Fidelity: 10.3%
Interestingly enough even though Fidelity got the most number of stock picks wrong, the ones they did get right yielded almost 1% more in returns than what I’m currently receiving.
How About When You Compare This to An Index Fund?
Would any of the hypothetical portfolios have actually beaten the S&P 500 stock market index so far?
Unfortunately no. The S&P 500 index (adjusted for the dates in which I made my stock purchase) is at 14.4% for the year. My portfolio is at 9.4%.
That means that if I had just went the easy route with an index fund rather than trying to pick my own stocks and outwit the market, I’d have almost 53% more earnings to boast!
Conclusions – Did We Find Good Stocks to Invest In?
So far – not really. While Yahoo and MSN seem to each be 90% right with their predictions, I don’t believe I’d assemble a portfolio based on just these opinions. A better approach would be to make your selections and then simply use the recommendations to validate your choices.
What’s an even better approach? Once again – investing in the S&P 500 wins over everything else. Just like John Bogle and thousands of other advisers recommend, unless you know something the rest of us don’t know, you’re most likely better off just putting your money into a stock market index fund rather than trying to beat the system.
Looking ahead for 2015 other financial experts are already saying that it’s going to be a ho-hum year for stock performance – predicting a 2% increase. If that’s at all true, then perhaps I should go back to using the Dogs of the Dow to find good stocks to invest in. By investing in the Dogs of the Dow you’ll be investing in a select group of stocks from within the Dow Jones index that will produce the greatest dividend yield. If I can secure a 4% dividend return on top of an assumed 2% gains return, then that’s not too bad.
Readers – How are your stocks doing this year? Is anyone’s portfolio beating the S&P 500 index?
Image courtesy of Teresa Avellanosa | Flickr
I also read a lot on both Yahoo and MSN. These are sites I believe provide the most accurate information about stocks and investments (I would also check out Fidelity), but it’s still in our hands what move to take, right? It is interesting that industrial production rebounded last month, we know that economists projected. Investors are also waiting for the Fed’s update on the timing and pace of interest-rate increases, which I am really excited about the outcome. Policy makers may decide on Dec. 17 whether to keep their pledge to hold interest rates low for a considerable time.
Yes, the actions and pending decisions of the Fed have been creating a lot of turbulence over the past few weeks. On one hand I’ll be glad to see things stabilize if interest rates go up but on the other hand I’ll be disappointed with the short term losses that will surely result.
After reading this, the index now looks like a good option for me..
I agree. Once again – indexing wins!
Very interesting that Fidelity was the one off the most. I’m mostly in index funds but in the part of my portfolio where I’m doing some individual stocks I’m right at 13-14% (not including dividends) so I’m fairly happy with that – especially after getting into some after the dip last week. It’ll be interesting to see where next year goes, but I’ll be planning on doing more of the same.
I was kind of surprised by Fidelity as well. I would have expected their research and recommendations to be a better indication of the future simply based on the nature of them being a broker.
This is exactly why I generally invest in the S&P 500 or Total Stock Market Index. Even if I enjoyed taking the time to pick stocks, I probably couldn’t do any better.
I think I’m slowly proving to myself the same thing. Though it’s been fun to research and pick out my own portfolio, I’m coming the realization that I’m no Warren Buffett.
Nice comparison. I think it’s great that you took the time to look back at what the “experts” recommended. The more and more I read about the performance of individual stocks, the more I appreciate our strategy of total stock market index funds, like Kim. Perhaps I will try to dabble in individual stocks in the future. But for right now, I can’t imagine adding any more tasks to my daily routine – especially one as important as building and protecting our endowment.
Thanks! I’ve always been interested in how close those expert recommendations really were to actual 12 month output. So this finally tells me what I wanted to know (if it is only a 1 year snapshot). By doing so it really does help you to appreciate the power and simplicity of an index fund strategy vs picking individual equities.
I know that I am what you call an overly conservative investor. I would have to rely on an professional to invest for me. This is some really good information and I think I really need to educate myself more in order to make some better decisions in the futur with my money. Thanks.
I can’t blame you for that! I’m the same way where I tend to be more on the conservative side of the investing spectrum. I can’t help it – its my money and I want to keep it! The good news is that only a small portion of my overall portfolio is in individual stocks, so this experiment is more out of fun than it is necessity.
After conducting this experiment, I’m not even totally sure a professional would be able to get picking stocks right. Even the big boys over at Fidelity had a number of misses.
Honestly, I have no clue! I don’t really keep up with the performance of my portfolio on a regular basis. I’ll look at year end and go from there. I am a long-term guy, so I just keep throwing money into my index funds and let the market work it’s magic. In the end, I’ll probably end up close to what the market returns. Boring, but it works.
That’s probably a better approach to take. It’s not worth it to sweat the short-term fluctuations when you know what the proven long-term benefits will be.
Great content you provided here, and its cool to see how the big guys are not perfect in their predictions. In my opinion I feel everyone should do index investing as well as a handful of individual stocks. A process like that will give you exposure to both worlds, and your not too tied to 1 specific sector or stock symbol. I like to be diversified while playing in the index fund world, and the individual stock world.
I agree. The bulk of your finances should be in long-term, stable growth. Indexes will do just fine for accomplishing this. But buying a few stocks here and there – its fun. It teaches you a lot about how investing really works on a micro scale rather than the broad macro index perspective. Plus if its such a small proportion of your overall wealth, then there’s no harm.
It’s interesting to see such a detailed site comparison between some of the larger sites and their analysts because it really goes to show how unpredictable stocks can tend to be. Of course there will be aspects that people will get right and that others will get wrong but just like with your findings, I’ve come to notice that everyone I speak to, regardless of the amount of time they’ve spent involved in the markets, or the amount of knowledge they possess, there really is no fail safe system. So much of the stock market deals in trial and error.