The unhelpful noise of short-term performance
Investing is simple, but not easy.
The decision to invest in the first place requires foresight, as well as discipline.
Here’s the basics:
1. Decide how much you want, need and are able to invest and what proportion of this will be into equities – they typically act as the drivers of positive portfolio returns. In the long run this can help to fund future spending goals – so getting it right is key and it’s where good advisers can add value.
2. Decide the broad structure of the equity and bond components of your portfolio. A good place to start for equities is the structure of the global markets, which defines the basic country, sector and company split and offers diversification.
3. Finally, you need to pick the funds to implement the strategy. This is where many DIY investors start, heading to the ‘best buy’ fund lists in the Sunday papers or some investment website. Here is where the fun and danger starts.
All sounds fairly simple, where’s the problem?
– Some funds – usually measured over short time frames such as three years – can have great looking track records. It’s easy to identify a fund that has done well in the past, but difficult to pick one that will do well in the years ahead.
– Evidence shows that picking a ‘market-beating’ fund manager is hard to do (let alone trying to do it yourself). Over the past 20 years, over 85% of all US equity funds failed to beat the market index and only around one third actually survived the whole period!
– Different parts of the market do well at different times, but no-one really knows who the future winners are, not even the professionals. Naïve investors take good short-term performance as a sign of skill. There is an old industry saying that markets pick managers, not the other way around.
– ‘Good’ performance may also simply be luck. You need at least 16 years of performance data to be 95% certain that skill rather than luck is the driver of outperformance, even for highly skilled managers. Three- or five-year performance records are largely worthless in identifying good funds. Yet that is where best-buy lists and many IFAs/DIY investors tend to focus.
In short as regulators have been warning investors for years now, past performance is no guarantee of future performance, and the studies show very few fund managers repeat periods of past out performance.
What should you do?
Capture the market return with well-diversified, low cost funds. Ignore best-buy lists and block out the noise about short-term performance. Does that sound like a lot to get right on your own? Get in touch!
Past performance can’t guarantee what investments will do in the future. The value of a portfolio can go down as well as up, so there’s a chance you’d get back less than you put in.
This communication is for general information only and is not intended to be individual advice. You are recommended to seek competent professional advice before taking any action.