It happens all the time. Intelligent people ask the wrong question about an investment recommendation.
“How has it performed?”
I’m not blaming investors for asking. For most decisions, it would be counterintuitive not to ask such a question. If you are choosing a contractor to remodel your bathroom, you would likely base your decision on whether to hire the contractors on their existing customer’s reviews on their past performance.
But for your portfolio, using your investment based on past performance is a recipe for disappointment. Markets go through cycles during which some sectors perform well during one period and very poorly at other times. I am not aware of anyone or any company that can predict with any consistency and accuracy what will happen in the markets.
A Globe and Mail article from a number of years ago analyzed fund managers who had 1st quartile during a given five-year period. Only 12% of these top-performing funds were first quartile during the ensuing 5 years, and many dropped to fourth quartile performers. While I do not have the statistics in front of me, I’m guessing that, on average, buying an investment that did poorly during the past five years would likely perform better during the next five years that buying a past stellar performer.
Basing investment decisions on yesterday’s performance has been compared to driving while looking the rear view.
Look at this from a different perspective. If a particular position has done exceedingly well during the past number of years, there is more than a reasonable chance that it is now overpriced and should be avoided.
Correct investment decisions are based on numerous factors, your age, risk tolerance, other investment positions, timelines, tax brackets to name a few. Knowing a particular investment’s past performance, while not unimportant, should never be the main focus of your decision.
The World Is Getting Worse Fallacy
The media is rewarded by focusing on and exaggerating bad news, often taken out of context and without alternative views. It’s no wonder many (most?) perceive the world as a nasty place that is getting worse. The facts tell a different and far more positive story. I want to share with you, in this and my ensuing blogs, facts that debunk almost every “bad news” media story you have likely heard.
Today’s fact is from “10 Global Trends Every Smart Person Should Know: and Many Others You Will Find Interesting” by Ronald Bailey & Marian L. Tupy.
Many of you likely feel that the world is becoming a more dangerous place to live due to significant publicity given to natural disasters. However, according to the authors, “The chance of a person dying in a natural catastrophe, earthquake, flood, wildfire, landslide or epidemic has declined nearly 99% since the 1920s and 1930s.“
Disclaimer: The views and opinions expressed in this article may not necessarily reflect those of IPC Securities Corporation.