Transcripts

"Commentary"-The Price of Popularity

SUSIE GHARIB: Tonight's commentator says, when it comes to investing, there's a cost to being popular. He's Allan Sloan, senior editor-at-large at Fortune.

ALLAN SLOAN, SENIOR EDITOR-AT-LARGE, FORTUNE: Buying investments that are popular may make you feel good, but it's generally not a good way to make money. Take the Standard & Poor's 500. Ten years ago, S&P index funds were becoming wildly popular. The theory was you couldn't go wrong buying the S&P. It had been returning 20 percent a year for 16 years. It gave you instant diversification, and you would own a piece of America's biggest companies, especially high-flying tech and telecom companies. Well, it turns out, you could go wrong buying the S&P if you bought it 10 years ago when it was very expensive. For the decade ended August 31st, the S&P returned only 4.7 percent a year. That's better than losing money, but its less than half the S&P's historical return, less than a quarter of what it had been earning for almost a generation, and not much more than you got from boring old Treasury bills. Meanwhile, mid-cap and small-cap stocks, which were out of favor 10 years ago, have done quite well, making 12.5 and 11.5 percent a year. Now, I don't know which investments will do well over the next decade. What I do know, though, is that investing in what's popular and expensive today isn't likely to give you a great long-term return. Maybe in some alternative universe, trees grow to the sky, but not in this one. I'm Allan Sloan.