The Risks of Looking Back at Last Year’s Best Investments

Chart 2Looking back at the investments that did well last year is a sure path to investment frustration. I recently received the following from financial writer Bob Veres. He is referring to an article in Financial Planning by Craig Israelsen that shows why chasing the “perfect” portfolio is a losing game.

“You already know that clients tend to focus on the best investments that they were not invested in during the previous quarter or year. They chase those returns, and never quite catch up.

Israelsen looked at 15 years of market data, and created a list of 12 asset classes that would be included in a broadly-diversified portfolio. He looked for the top-performing asset classes, and found that if somebody could have predicted the top-performer each year, and concentrated there, he would have earned an annualized 32.25%–compared with 4.39% a year for the S&P 500.

But… If an investor had looked back and moved all his assets into last year’s top-performing asset class, the return would have been 2.71%. Investing in all 12 asset classes each year and rebalancing annually would have generated an annualized 7.95% return.”

Israelsen’s complete article is well worth reading; you can find it here.

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