Investment Returns
All the investment pundits and TV “talking heads” try to predict (guess) which asset class will be the next great performing group. That is like looking out a window, on a rainy day, and trying to guess whether raindrop “A” will beat raindrop “B” down the outside of the window.
History has proven to us that asset classes will produce their average risk adjusted rate of return over time. People try to load into the “hot” asset class only to be burned every time. Behavioral science shows that human beings will follow the herd instinct and be motivated by either “greed or fear”.
The greedy technology times of 1998 and 1999 led to the “tech wreck”. The housing bubble of 2005-2007 led to the housing crisis. These events are of late but we could go back in history to see many more. The “fear” times of the stock market in 1929, 1954, 1987, 2001-2003 (and many others) led to spectacular gains soon after. The philosophy I have always used with my clients and my personal investing is simply… “buy when there is blood on the streets” and “sell when everyone else wants in”. This is a general statement, but, is an offshoot of buy low, sell high. I have never been a trader, but rather, a long term investor. My dictum above simply means that my clients (or I), will over weight (load up or stock up) when an asset class is low. Correspondingly, we will reduce our allocation, in an asset class, as it becomes hot.
I have found after 50 years of investment study, simply…that which is hot today is cold tomorrow and the cold thing is hot tomorrow.
To prove my point… attached is a copy of The Callan Period Table of Investment Returns (1988 – 2007). You will see the years when certain asset classes are number one only to be the lowest performing group the following year…and vice versa.
My suggestion, as always,…develop your Investment Policy, set your Asset Allocation and adjust that allocation on, say, an annual basis at most. You will reach your investment goals.
http://www.callan.com/research/institute/download/?file=periodic/free/256.pdf