Chasing last year’s top returns

Investing bears no resemblance to gambling and, unfortunately past ‘form’ seldom provides an indication of future performance. Many investors are tempted to look at the best performing sector over the past year and then switch their investments accordingly. Beware this can be a recipe for disaster.

In many cases, last year’s best will turn out to be this year's worst! For example, Australian shares experienced an average return of 19.8% from 2009-2010 but proved to be the worst performing sector in 2011 with a performance of -11.0%. Statistics reveal similar scenarios in all asset classes.

However, individual market sectors tend to maintain similar volatility characteristics. For example, international shares tend to have the highest level of volatility, while cash has the lowest level.

The simple answer to this lack of form is to establish a portfolio with a mixture of the various investment assets that suits your own objectives and risk profile. Staying with this formula over the long term will invariably provide the most satisfactory outcome, irrespective of the performance of individual assets.

Contact your licensed financial adviser if you would like to review your portfolio allocation and ensure it meets your needs and risk profile.

     

Source: Russell Investments Risk vs Return 2014 edition.