The Summer Olympics are here! We will take the easy shot and incorporate Olympic talking points into our article. Hey, we only get this chance once every four years. The goal of the Olympic games is for the athlete to wind up on the podium with a ribbon and a medal. The image of that possible moment is what fueled all those years’ worth of hard work. And for those of us who engage in investment management, we would be lying if we too did not dream of a day where we wind up on the proverbial pedestal. Even if you are not the manager, it is quite natural to compare portfolio returns like results after a round of golf. But here is where the analogy falls short – successfully investing over a long period does not have much to do with winning medals.
Investment strategies capable of outpacing the funds’ peers in the performance tables are also prone to finding these same funds spending ample chunks of time at the bottom. Variability of annual performance makes such strategies neither inherently good nor inherently bad. Massive market outperformers, on a short-term basis, are structured, so they hit the proverbial cylinder. They are not firing on all cylinders. They just happened to hit the right one. Rewarding them for luck is a mistake. By their very nature, such funds or strategies will be heavily concentrated and reliant on a single factor, industry, or set of companies. The broader the holdings are, the closer to market averages and benchmarks they will be and, thus, often more comparable to the average or middle of the performance. Being heavily concentrated is what makes it possible to be significantly different.
But staying consistently at the top has proven to be virtually impossible. Investment managers that wind up at the top for a long period – say ten years – will have plenty of shorter periods where they dominate. But they will also have extended periods at the bottom of the charts as well. Therein lies the difficulty. When a fund or manager has those periods at the bottom, we will rightfully question them. Do the same factors still work? Has she lost it? More times than not, the data says that we humans bail because the pain of such harsh losing streaks is too great to bear.
Similar to the Olympics, novice investors notice current market winners and invest when the performers are near the top of that podium. We tend to lose excitement as they fail to perform to our expectations. Such decision-making prompts us in and out at the wrong times. Existing in the middle of the pack is a lot more palatable in investing than it is in the Olympics because we are more likely to stick with a strategy. Yes, the top is excellent, but we are more interested in consistency and avoiding portfolio concentration requiring us to dump our heroes at an inopportune time. Successful investors will find a simple participation ribbon more appealing than winning the gold at the financial Olympics.
Joseph A. Clark is a Certified Financial Planner and Managing Partner of The Financial Enhancement Group, and an SEC Registered Investment Advisor. This article was co-authored with Adam Harter, CFA. Contact Joe at yourlifeafterwork.com or 800-928-4001. Securities offered through World Equity Group, Inc. Member FINRA/SIPC. Advisory services can be provided by the Financial Enhancement Group (FEG) or World Equity Group. FEG and World Equity Group are separately owned and operated.