Legendary NASCAR driver Dale Earnhardt Sr. once said, “Second place is just the first-place loser.”
But what if probability showed that finishing in second place… would make him the statistical favorite to win the next race?
He might’ve changed his tune.
Well, in the stock market, second place is the odds-on favorite for next year’s first place when it comes to asset classes.
In fact, asset allocators would’ve been handsomely rewarded by following one simple strategy over the last 48 years.
It really couldn’t be much easier to follow… So in today’s issue, I’ll tell you what it is, and more importantly, why you should implement it in the coming days.
The Bridesmaid Strategy
It’s called the “bridesmaid” strategy. My colleagues at The Leuthold Group developed the method.
If you haven’t heard of The Leuthold Group, it’s one of the top financial institutional research firms in the world. (You can learn more about Leuthold here.)
Leuthold crunched the numbers by measuring the performance of seven asset classes since 1973:
Large-cap stocks (S&P 500 Index)
Small-cap stocks (Russell 2000 Index)
Foreign stocks (MSCI EAFE Index)
Real estate (NAREIT Index)
Commodities (S&P/GS Commodity Index)
U.S. Treasuries (U.S. 10-year Treasury Bonds)
And according to its research, the previous year’s runner-up generally outperforms the other six the next year.
Here’s how the approach works…
You start with these seven major asset classes. And you observe each one’s returns from the prior year. Then, you buy the second-best performer (the “bridesmaid”) and hold it over the next 12 months.
And as you can see in the chart below, picking the “bridesmaid” hands you the highest return over the long haul…
This bridesmaid strategy has returned an annualized 14.3% over the last 48 years. In comparison, the S&P 500 has only returned an annualized 10.6% during the same timeframe.
Now, this momentum approach isn’t foolproof…
For example, real estate finished second in 2019, making it the 2020 bridesmaid. Yet real estate finished in sixth place last year.
Remember, the long-term results matter most. And it’s hard to find active fund managers who beat their benchmarks in the long term.
In fact, S&P Dow Jones Indices reports that only 15% of all domestic funds beat the U.S. stock market over the last decade.
But the bridesmaid strategy has eclipsed the S&P 500’s returns in 31 of the last 48 years – for an impressive 65% win rate.
So let’s take a look at what history says is the best bet for 2021…
The Top Choice for 2021
According to 2020’s returns, this year’s bridesmaid is small caps…
|Asset Class||2020 Return|
|10-Year U.S. T-Bonds||10.0%|
Source: The Leuthold Group
Since small caps were the silver medalist in 2020, they’re the top choice for 2021. It’s that simple.
If you’d like to get some exposure to small caps, consider an exchange-traded fund (ETF).
You can use the Vanguard Small-Cap ETF (VB) or the iShares Russell 2000 ETF (IWM). They’re the top two ETFs based on assets in the space. And they have ultra-low expense ratios of 0.05% and 0.19%, respectively.
If you want to really benefit from this strategy, you need to act now. This is an annual rebalancing strategy. And we’re about two weeks into the year.
So if you want to implement the bridesmaid strategy, take a small position today and hold it through the end of 2021. And be sure to keep this bridesmaid strategy in mind when you’re rebalancing your portfolio at the beginning of each year.
In tomorrow’s Palm Beach Daily, I’ll show you a contrarian angle on the bridesmaid strategy… a way to beat average market returns by nearly 3% per year – year in and year out.
Analyst, Palm Beach Daily
P.S. In our Palm Beach Letter service, we track bridesmaid assets and more… everything from dividend-paying companies, to real estate, to cryptos.
And right now, we’re seeing a sector of the market that’s poised to become the No. 1 investment of the next 10 years – one with the potential to turn a small $1,000 investment into $1.6 million or more.
But once the market catches wind of this explosive opportunity, your chance at making market-beating returns will be in the rearview…
Click here to watch Daily editor Teeka Tiwari’s presentation on what he’s calling, “the No.1 investment of the decade.”