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If the last five years are anything to go by, then a strategy of picking individual stocks beats just buying the major indexes – provided you pick the winning stocks, research from financial Web site the Motley Fool showed.
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The FTSE-100 [GB;FTSE Loading... ()] has risen just 13 percent over the last five years, an average return of around 2.5 percent per year, the research showed. But the top performing stock in the index, Autonomy, [AU-LN Loading... ()] has risen more than 900 percent over the same period.
"Allocating, say, a small portion of a share portfolio to just one or two of the companies that have outperformed the index … would have delivered better returns than investing in the index alone," the Motley Fool said in a statement.
Looking back on the main gainers of recent years, some of the returns seem very tempting. The ten top-performing shares in the FTSE have risen over 400 percent in the five year period, the report said.
Usually, people prefer to invest in an index as putting all one's capital in a few stocks is risky because the chance of picking out a loser is as high as that of picking a winner.
Here are some of the top stocks highlighted in the report: Tullow Oil [TLW-LN Loading... ()] up 765 percent; Randgold Resources [GOLD-LN Loading... ()] up 694 percent; Vedanta Resources [VED-LN Loading... ()] up 539 percent; Antofagasta [ANTO-LN Loading... ()] up 285 percent.
Aside from the basic resource sector, which has clearly done well over the last five years, insurance group Admiral [ADM-LN Loading... ()] also performed well and rose 260 percent.
The financial crisis has a lot to do with the weak performance of stock indexes over recent years. The historical average is around 11 percent per year, but the slump in 2008 helped knock the average return over the last five years down to 2.5 percent per year for the FTSE.
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