It is unlikely any stock has an expected return of 100%. That seems too high to be the cost of equity capital for a company, and it’s doubtful anyone would sell a stock with an expected return ten times higher than the historical stock market return. A realized return that big likely means the company surprised investors in a good way.
The Magnificent 7 stocks returned on average more than 111% in 2023, exceeding the S&P 500 Index by over 85 percentage points. While it’s hard to say what cashflow expectations were built into their stock prices, comparing analyst earnings estimates to actual earnings suggests these companies exceeded expectations for the year. All seven reported earnings exceeding average forecasts. For example, Nvidia posted an earnings per share 37.4% higher than the average analyst expectation. Contrast this with 2022, when five of the seven companies’ earnings fell short of analyst expectations. The average Magnificent 7 stock return that year trailed the S&P 500 Index by 28 percentage points.
Expecting Mag 7 outperformance to continue is to bet on these companies further exceeding the market’s expectations. Simply meeting expectations may result in returns more in line with the market, consistent with the history of top US stocks.
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Research shows that size, value, and profitability are reliable drivers of expected equity returns.1 This paper summarizes the premiums associated with these return drivers across countries and regions. It also shows, using simulated marketwide strategies that integrate multiple premiums, how investors can achieve better outcomes by diversifying across markets.
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Each year, Dimensional analyzes returns from a large sample of US-domiciled funds. This year’s study updates results through 2023 and includes returns from mutual funds and exchange-traded funds (ETFs) domiciled in the US. Our objective is to assess the performance of fund managers relative to benchmarks.
The evidence shows that a majority of fund managers in the sample failed to deliver benchmark-beating returns after costs.
We believe that the results of this research provide a strong case for relying on market prices when making investment decisions.
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Index funds are widely viewed as a way for investors to achieve broad, passive exposure to certain markets or asset classes. However, index fund investors may overlook the fact that the creation and maintenance of an index fund entails numerous active decisions. In practice, index providers make many choices that have important implications for the characteristics and returns of the benchmarks they produce. As with any investment strategy, it is imperative for investors in index funds to evaluate whether these choices align with and serve their investment objectives.
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Many people start out managing their own investments. But as their earnings and assets grow, their financial needs and challenges become more complex—and continuing to go it alone could prove costly in terms of investing miscues. Consider three common mistakes that can reduce returns and increase anxiety:
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