Hello and welcome to this month's edition of Investment Insights.

You have all heard the disclaimer before... "past performance should not be used as an indication of future returns". This is the standard disclaimer that all managed funds and/or portfolio managers include on any document or chart that talks about their returns. In this month's featured article, "Quantifying the impact of chasing fund performance", the team at Vanguard have provided numbers that support this disclaimer. In their research, Vanguard ran simulations over a 10 year period (from 2004 to 2013) that produced some 40 million possible return paths for investors. The simulations adopted two basic strategies:

  1. Performance chasing – invest into a fund with an above median three year annualised return and when the fund falls below this measure (or closed), sell it and reinvest into a fund that is in the top 20 performing funds (based on a three year performance period)
  2. Buy and hold – invest into any fund, sell only if the fund goes out of business, and reinvest into a median performing fund

Of the two strategies, the buy and hold strategy was the clear winner and did so irrespective of the category that the fund was in (i.e. Large Cap, Mid Cap etc.). The conclusion of the research was that some periods of below average performance are inevitable, but at these times investors need to remain disciplined in their approach and avoid performance chasing.

Daniel Minihan, our Director of Wealth Management, has written a number of articles on this particular issue, including his recent article, "An "Average" Investor". In this article, Daniel looks at what the average return of a diversified portfolio is compared to the average return of an investor - the difference is quite stark. The article also draws upon evidence from the research conducted by Vanguard on what can happen when you start trying to chase performance. Chasing returns can also be extended to chasing asset classes. It was only a few years ago that all and sundry were steering investors to the Australian share market with the belief it would produce better returns... In case you missed it, the U.S. market is at all time record highs, whilst Australia is still 20% away from its all time record.

If you would like to discuss your portfolio or any aspect of your financial affairs, click on the links below to contact one of our advisers today.

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