An all too common mistake in investing, is to simply back last year’s winner. On the face of it, it seems appropriate to follow what worked last time and all too often investors pile into the best performing asset class of the last year in the hope that success will be repeated. However, as the below table shows, very rarely do asset classes consistently outperform and backing last year’s winner could very easily end up making you a loser.
This table reveals the best performing asset classes for each financial year since 2008, and shows that, on a very regular basis, one year’s winner fails to repeat its outperformance in the following year.
Chasing last year’s winner (financial year returns)
Source: Lonsec, Bloomberg, FE
Conversely, the table reveals that avoiding asset classes that performed poorly in the previous year can cost investors in the following year. For example, if investors had reduced their exposure to Aussie shares following a negative return in 2012, they would have missed out on one of the better performing asset classes in the subsequent two years (+21.9% and +17.3% respectively).
It’s a reminder that a well researched, diversified portfolio is better over the long term than chasing last year’s winners. Identifying your long term goals and building a portfolio to achieve that aim, rather than just chasing an immediate performance ‘sugar hit’ is more likely to deliver the desired outcome.
Lonsec portfolios utilise our extensive manager and equity research knowledge to build portfolios that aim to perform over the medium and long term. Reducing the volatility of the portfolio is a key goal of our selection process and asset allocation decisions.