Why Investing in Last Year's Top Stocks is a Risky Move

Energy stocks were the only sector in the S&P 500 to deliver positive returns in 2022, with an average return of 59%.

The top performer, Occidental Petroleum, returned an impressive 119%. However, despite this strong performance, experts advise caution before adding these stocks to your portfolio.

Experts warn against "chasing the few things that have performed well" and advise against making major changes to your portfolio, stating that it is "a recipe for disaster."

They recommend being careful when considering adding last year's top performers to your portfolio.

Historically, Purchasing Underperforming Stocks (Losers) Yields Better Returns in the Long Term

The energy sector has performed well in 2022 due to rising prices.

However, as the market operates in cycles, it is expected that the performance of the energy sector will eventually decline, and underperforming sectors will catch up.

After a down year in the market, it has historically been more beneficial to invest in underperforming sectors, such as technology and consumer discretionary, rather than continuing to invest in the top-performing sectors.

Research suggests that this strategy has outperformed the market 60% of the time since World War II. It is important to note that this does not mean completely shifting the entire portfolio into the worst-performing sector, but being aware that the factors driving the market are unpredictable and diversifying the portfolio accordingly.

Select Stocks Carefully and judiciously

As a long-term investor, it is recommended to build a diversified portfolio that spreads investments across multiple asset classes to minimize the risk of a significant loss from a single investment.

Experts advise against investing too heavily in one specific stock, as it can be more volatile and have the potential to lose value. If you choose to invest in individual stocks, it is important to evaluate each stock on its own merits, rather than following market trends.

It is important to focus on opportunities where the market does not fully understand the intrinsic value of a company. Different investors have their own methods for determining a company's value, such as analyzing the stock's performance about earnings or cash flow.

However, it's important to note that as a stock's price increases, it may become more expensive compared to its peers and historical averages.

In 2022, energy stocks were undervalued and after a 59% increase, it's the sector that is considered the most overvalued now.