THE roar of the crowd as the white flag is raised for the Supreme Novices’ Hurdle on the first day of the Festival stills rings in many people ears who have attended the opening day of the Cheltenham Festival.
Golden Cygnet won as 4/5 favourite this opening race by 15 lengths back on the March 15th, 1978. The bookies priced the six-year-old gelding post-race at 8/1 for the Champion Hurdle the following year but alas he did not participate due to a fatal fall at the last hurdle in the Scottish Champion Hurdle on April 15th, 1978. This Cygnet would never get the chance to grow into a swan.
We all love to back winners be they the four-legged kind or investing in a particular star performing fund. So how have the best performing investment funds performed in the calendar year after their top performance?
We look at these specific funds over a period of consecutive calendar years from 2005-2015.
Table 1 below illustrates if you invested €10,000 at the start of 2005 in the best performing fund and re-invested the proceeds with 20/20 vision at the start of the next calendar year into the best performing fund for that year, what your outcome would be at the end of 2006 and so forth.
The information makes for very interesting reading –
• If you kept investing your initial investment (€10,000 in this instance) into the historic best performer from the previous year, you would end up with a loss after 10 years.
• The mantra that past performance is no guarantee of future performance is clearly demonstrated.
• The performance of the top performing fund dipped in every calendar year (2005–2015) and even went negative in some calendar years in the calendar year following their top ranking.
• There are massive swings with respect to the performance of funds from one calendar year to the next. (for example Zurich Life Eurozone Property Fund increased 50.3% in 2006 then in 2007 decreased 25.6%)
• There is a large mix of asset classes for each performing fund every calendar year.
• There is no real definite pattern by Life Company or fund or asset class to the returns achieved annually from each of the individual top performing funds.
To summarize; the investor needs to know their investment objectives, time horizons and risk tolerance
There are several learnings we can take away from the reality of this investment management information:
1. Just because a specific fund ‘flew past’ the winning post as a winner in one year does not mean they will do so again the following year. A lot of can happen in 12 months, as all of us know only too well in the world of horse racing.
2. Diversification of asset classes (equities, government bonds, corporate bonds, property, alternatives) is key to giving a stronger and better return without being ‘unseated’.
3. It is time in the markets that counts not timing of the market. Nobody can time the market. We need only look back on 2020 to see this clearly. On March 23rd, 2020, the S&P 500 (a stock market index that measures the stock performance of 500 large companies listed on stock exchanges in the United States) stood at 2,237 and now as I write it is nearly at an all-time high of 3,875! Sit tight and be patient. Short termism is the key to most investment failures, time is generally the key long-term ingredient to success. For most investors timing is both a practical and emotional responsibility!
4. Take a long-term view of your investment time horizon (7-10 years plus). Stay the distance and do not listen to the noise in the media concerning stock markets, funds, and specific shares. (e.g., GameStop). Remember investment markets change every day. Do not follow Bloomberg every day as it will play havoc with your head!
5. Make sure that within your diversified fund you have exposure to uncorrelated asset classes.
6. Good solid investment advice from a qualified financial advisor is crucial to execute your investment strategy in line with your needs and goals.
7. Finally, do not chase short-term fund performance. As the statistics show this is a mug’s game.
• Investment objectives: What is the objective of this investment? (Educational fees planning? Early retirement? Deposit for that holiday home in the Algarve?).
• Time horizons: Are we talking five, 10 or 20 plus years for instance? Anything shorter than five years is not investing; it is saving. The most suitable institutions for savings are your local Post Office or Credit Union.
• Risk tolerance: What is yours? The S&P 500 fell by over 32% from its previous high on 23rd March 2020 last. Have you the stomach for such a drop?
Remember that long term investing does not have to mean lots of risk. Do not confuse volatility with risk. History tells us that if you invest over long periods of time in the great companies of the world (equities) through pooled funds you will grow your way to accumulate wealth.
Niall Rooney is Financial Planning Manager with CityLife Galway and can be contacted at 091 – 520608 or firstname.lastname@example.org.