Financial Planning Fridays #126: The Worst Investment Strategy
After two strong years for the S&P 500, record amounts of new money have flowed into the index even as it has grown more expensive. This Presilium video explains why chasing the recent top performer can be one of the worst long-term strategies and makes the case for diversification and discipline over recency bias.
After two strong years for the S&P 500, record amounts of new money have flowed into the index even as it has grown more expensive. This Presilium video explains why chasing the recent top performer can be one of the worst long-term strategies and makes the case for diversification and discipline over recency bias.
Key takeaways
- Chasing whatever asset class performed best recently is a common but risky approach that ignores valuation and concentration risk.
- Heavy inflows into the S&P 500 after back-to-back strong years can leave investors more concentrated and more expensive than they realize.
- Diversification across asset classes helps manage risk when a single index has run up sharply.
- Past performance of an index does not guarantee future results; valuation matters for forward expectations.
Hi Friends, Let’s talk about a topic that’s been making headlines: the performance of the S&P 500 and its impact on investment strategies. Over the last two years, the S&P 500 has been the best-performing major asset class. As we often see historically, even as it’s become relatively more and more expensive, this has attracted a record-breaking amount of new investments. In fact, the Vanguard S&P 500 ETF set a new record with inflows exceeding $117 billion last year alone, more than double the previous record. Additionally, U.S. stock funds had more than six times the amount of new investment dollars added to them last year compared to international stock funds, according to Morningstar. But is this really the right move? Should you follow the crowd and invest heavily in the large U.S. stocks that have performed so well? Or should you consider something else, like international stocks or other asset classes that have recently underperformed? To answer this, we examined the performance of seven major asset classes over the past 25 years: We then studied two distinct and opposite strategies: Invest in the best-performing asset class from the prior year. Invest in the worst-performing asset class from the prior year. Let’s start with the popular choice, investing in the best-performing asset class. This strategy has produced an average annual return of 4.8% over the past 25 years and $1M grew to $1.8M. Now let’s look at doing the exact opposite of most- investing in the prior year’s worst performing asset class instead: The results are stunning! This counterintuitive strategy resulted in an average annual return of 9.2% and a final investment value that was triple the strategy of investing in the best performing asset class. So how do we take advantage of this for you at Presilium? By rebalancing your investment accounts on a regular basis, which in practice means doing something often not viewed as a popular decision in the moment: Selling part of your best performing asset classes to invest more in the worst performing. By doing this, we hope to decrease your overall risk, improve your returns over time, and, in turn, reach even more of your financial goals. Thank you and we look forward to talking with you next Friday. Be on the lookout for our next Financial Planning Fridays episode. Subscribe to our Youtube Channel so you never miss an episode. Or contact us directly; schedule your 15-minute call with us today.
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