Have you considered making changes to your portfolio based on recent financial portfolio performance? It certainly sounds attractive to hook up with last year’s star performers – be it a stock, ETF or mutual fund.
Everyone has heard of or knows someone who makes a decision to put all their eggs in one basket and that basket proved to be a tremendous winner. Just recently, you may have heard about the school that made an investment of $15,000 in Snapchat and based on the IPO (Initial Public Offering) made $24 million. Oh what a great day for that school. (http://www.latimes.com/business/la-fi-tn-snap-winners- 20170303-story.html) That makes for a great news story and makes one drool at the possibility of ‘instant’ riches. Investors seeking high financial portfolio performance improvements often point to stories like these as proof; and they quickly run after the latest mouth watering trends.
Such rare stories really don’t have a lot to do with chasing winners, except for the fact that the emotion of making easy money, fairly quickly is an emotional construct that many people fall prey.
Let’s take a look at a couple of bits of data to see if it makes sense to chase last year’s winners. Below is the JP Morgan Guide to investments chart on asset class returns for 2002 to 2016.
For the 15 years illustrated, only 3 times did the top rank repeat itself (2010-2011, 2011-2012 and 2014- 2015). Let’s take a year when this may have been especially appealing based on emotional driven concerns. In 2008, fixed income return 5.2%, with many people feeling very discouraged by the stock market. Had you chosen to follow the leader, you funds in 2009 would have returned 5.9%, even better than 2008. Yet the ‘leader’ that year returned 79.0%. Not so good following the leader, is it?
Now you might be saying, well that winner may not repeat as #1 but certainly it’s following year performance is pretty strong. Let’s compare the winner one year with the following year winner. The average difference in performance of the prior year winner to present year is over 23 1⁄2%. Again, this is probably not the results you were hoping to achieve.
Here’s a summary chart from an analysis performed by Vanguard.
In EVERY instance the buy-and-hold strategy outperformed the performance chasing strategy. The analysis included over 3,560 funds and only sold underperformers based on that fund’s 3 year rolling average return when it fell below the 3 year median for the fund category. Transaction costs and taxes were not included in this analysis, which would make the performance differences greater.
Looking at the performance of asset classes in a ranking fashion and mutual fund analysis illustrates that chasing recent winners is likely to be a losing proposition.
Changes to a portfolio are not based on chasing a performance winner. Changes are made to a portfolio when one or more of the following occurs: your risk tolerance changes, other asset buckets come in or go out of the investment mix, strategic changes in the market occur or asset management strategies no longer fit your investment profile.
At Franklin Chase Financial, we don’t believe in chasing after the hottest ticket items, we believe in staying focused on long term financial portfolio performance goals. Investing should be looked at wholistically, taking into account risk, opportunity, and your long term financial vision. Franklin Chase implements a suite of tools that help you achieve these goals and avoid the landmines of chasing short term financial gains.
Franklin Chase Financial is committed to helping you choose the right investment strategies through learning and education. For North Carolina residents we are currently giving away complimentary copies of Tax-Free Retirement written by Patrick Kelly. You can grab your copy by signing up below!