The rand is ‘getting caned’ amid fears after record low – Business Day
US stocks plummet amid global rout – Bloomberg
Global markets plunge – Financial Times
Hysterical headlines like these may have unnerved you, but keeping your long-term goal in mind will help you stay the course. These won’t be the last headlines like this and we may see some even worse. Such emotive language fuels our natural irrational behaviours and reaffirms the old adage that markets succeed whilst investors often fail.
It is times like these when the temptation to time the market and stock pick can become overwhelming – or to try pick the best asset manager or fund.
A recent article by Old Mutual Wealth reminded me of some of the basic principles.
HINDSIGHT DOESN’T PAY DIVIDENDS
In its most recent survey, the S&P Dow Jones reported that of the 681 US equity funds ranked top quartile over 12 months to September 2012, only 33% retained that ranking one year later and only 9% two years later. Taking a five-year duration, of those which made the top quartile for the five years to September 2009 only 20% repeated their performance in the five years to September 2014, while 27% ended up in the bottom quartile.
Performance ratings therefore have to be contextualised – and achieving your investment goals is arguably a better indicator. Furthermore, rather than just looking at numbers at a particular point in the investment cycle, it may be more fruitful to understand why certain fund managers consistently do well, and how their investment style may better suit your desired outcomes.
Remember, if you are planning for retirement you have a 40-year plus time horizon. You have no business looking at short-term performance results of funds with track records as short as ten years.
In summary, make the following your new investment adages:
- Past performance is no guarantee of future performance
- Aim for your goals rather than to beat the peer group
- Understand why managers perform well
- Look to your time horizon
Author: Mike Lledo CA(SA) is the CEO at Consolidated Financial Planning