Performance chasing, a dangerous game
2022 has been a year filled with volatility in the markets. Last years winners became this year’s losers. META (Facebook, Instagram & WhatsApp) used to be the fifth-largest by market cap in the US, worth more than a $1 trillion, and nearly three times the size of the biggest US bricks-and-mortar retailer, Walmart Inc. Currently, Meta is smaller than Walmart and has become a prime example of the topic.
In times like these – marked by volatile markets, geopolitical tensions, interest rate hikes and Covid threats – investors start looking at previous winners. They change their current investment portfolio to include these historical top performers, hopeful that they produce the same results as in the past.
Markets move in cycles and last year’s winner is not necessarily this year’s top performer.
In every asset manager’s terms and conditions the client is warned, when showing returns, past performance should not be seen as an indication of future returns. Markets move in cycles and the winner of last year is not necessarily going to be the top performer this year.
See the below example of the South African top equity funds since 2012.
The conclusion? No one can predict markets and performance chasing seldom leads to positive results.
Rather than switching from manager to manager based on past performance, try the following:
· Look at the consistency of a fund manager over the longer term, during bear and bull markets;
· Invest in a portfolio that implements a reliable investment philosophy that is in line with your investment period; and
· Make sure you are comfortable with the risk profile of the investment.
The Optimum Investment Group made an informed decision not to promise top performers to our clients, but rather to focus on long term consistency and superior risk adjusted returns.
Investing requires consistency and patience. It is a long game, investing is a marathon, not a sprint.