The Investment Scientist

Chasing Winners is NOT a Winning Strategy

Posted on: February 19, 2015

Remember When Everybody Wants to Be in Gold?

At the turn of the year, a few clients asked me a very good question: “Why my portfolio is not doing as well as the S&P 500 index? Shouldn’t we invest more in US stocks?”

The answer is very simple, US equity is only one component of the portfolio, it happened to do the best last year. The best component of the portfolio will always do better than the whole portfolio. That does not mean we should not diversify.

In fact, I got similar questions every year. Four years ago, it was like “Why didn’t we invest more in emerging markets? there’s no way the US market will do better than emerging markets.” Two years ago, it was like “Why shouldn’t we put everything in gold? all of my friends are investing in gold.”

It’s all too human to chase winners. But chasing winners (be it US equity, or emerging markets, or gold) have proven to be a losing strategy over the long run. I wrote an article about that four years ago, the idea is still very valid today.

The article is base on Black Rock’s twenty year asset class return table.

I compare three strategies: momentum vs contrarian vs diversified. With the momentum strategy you always invest in the best performing asset class last year; with the contrarian strategy, you always invest in the worst performing asset class last year; with the diversified strategy, you just stay diversified and disciplined.

It turns out the momentum strategy is the worst by a mile! Go read the article by yourself.

If you want to find out how I can help you, schedule a Discovery review with me. If you are not ready, you can still get my white paper for free: The Informed Investor: 5 Key Concepts for Financial Success.

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Author

Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC. He is also a regular contributor to Morningstar Advisor and Physicians Practice. To explore a long-term wealth advisory relationship, schedule a discovery meeting (phone call) with him.



You may also get his monthly newsletter, or join his Facebook page for regular wealth management insights. Michael's email is info[at]mzcap.com.

Twitter: @mzhuang

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