New Year's Resolutions
A year is the amount of time taken for the Earth to complete one orbit around the sun — essentially travelling a distance of around 149.6 million kilometers. For us, the transition of the calendar year can also be exciting — moving on to a (hopefully good) year.
Many use this time to take stock of both their personal and financial life. As such, whilst it makes very little difference, the new year is also when many review their investments and decide which ones to hold onto and which ones to cut. Out of the hundreds and thousands of investment options (stocks, bonds, ETFs, mutual funds, alternatives etc), it can be quite a daunting task to choose the right one. Many people simply choose what has been doing well over the most recent period. However, choosing your investments this way does not necessarily lead to a good outcome.
For one, the majority of professional investors and the funds they manage fail to beat the market. SPIVA, which has been tracking professional manager performance against the market over the past two decades, shows that 96% of all funds in the US underperform over the past 20 years¹ on a Risk-Adjusted basis (we also see similar numbers in other regions). Many investors naturally would shy away from underperforming investments and tend to chase those which are doing well.
So what happens when you choose a high-performing fund? The data below shows that almost ALL of these high performers subsequently do poorly. For instance, nearly 9 out of 10 underperform their benchmarks by over 1% and two-thirds underperform by over 3% — literally giving investors a poor run for their money.
What if you are really interested in the markets and like to do your own research and selection? The results may be even worse as studies indicate that individual or DIY investors underperform the market by even larger margins. Dalbar’s Quantitative Analysis on Investor Behavior (2022) showed that on average, such investors are behind by anywhere from 3%² to 5% per year.
Research by investment giant Vanguard showed that even when you invest according to evidence-based academic principles, there will still be underperformance over long periods. Often, investors do not have the patience, nor the guile to ride it out.
Some things that you can do to have a better investment experience:
Don’t be performance chasing — when you construct your investment portfolio for the long-term, ensure that it is robust; with the expectation of both good and poor performance built in. Also, it should be constructed with academic and time-tested principles as a basis.
Limit the use of concentrated active strategies or those that just sound “exciting” or “sexy” because it is hard to tell if the fund underperformance is intentional or just a plain mistake. Often, these thematic investments tend to fall out of favour quickly.
Working with an evidence-based adviser with deep market experience can help you design a financial plan and investment portfolio that can give you the best chance of a positive investment experience.
It may be a good time to take stock as we enter into the new year, but not necessarily a good time to re-jig all your investments.
In the same way that you would not attempt a high risk activity such as sky-diving without professional supervision, investors can benefit greatly by relying on an adviser — having the peace of mind knowing that their plan is in the hands of a professional.
If any of the points speak to you and you would like to have a exploratory discussion or a second opinion, click here to schedule a chat with us. Our 30-minutes exploratory meeting is complimentary - either Zoom or In-Person.
¹Data as of Jun 30,2022
²Data from 1/1/1992 - 31/12/2021 - Dalbar QAIB 2022 Study