ONE of the exhortations of financial planners and advisers generally is to maintain a balanced portfolio of assets.
However, it is often impossible to break through the ‘greed/fear’ cycle so prevalent among investors.
The folks at Perpetual Funds Management provide a good comparison of the returns that emanate from this greed/fear cycle.
The point of comparison was to invest $100,000 in the best asset class based on the previous year’s performance versus investing $100,000 in the worst performing asset class from the previous year.
The results of the investment program over the past fifteen years were interesting.
Investing $100,000 in last year’s best performing asset class over the fifteen years to December 1998 –
1. Last year’s best asset class was the best asset class this year only twice
2. The portfolio went backwards five times
3. It was invested in cash once during that period
4. It was invested in Australian shares in 1987 and 1994 and bore the brunt of the corrections in both those years
5. It was in international shares in 1990, the worst time to be invested internationally in recent memory
6. The final portfolio value was $551,748.
Investing $100,000 in last year’s worst performing asset class over the fifteen years to December 1998 –
1. Last year’s worst asset class was the best asset class this year on six occasions
2. The portfolio never went backwards over the 15 year period
3. It was in cash seven times over the fifteen years
4. It was in cash in 1987 and 1994
5. The final portfolio value was $1,733,086.
The moral of this story is an important one.
The greed/fear cycle so many investors exhibit would have led to the first scenario.
It is difficult to predict with any certainty which sectors will perform over the next year.
However, a balanced portfolio with exposure to all the sectors will achieve better returns without the attendant risks.
