Avoid rearview mirror investing
Joel Dresang: Steve, it’s that time of year when investors are getting year-end statements. They’re seeing magazine covers touting the most successful funds from 2015. What should investors be doing with that information?
Steve Giles: Well, Joel, I think it’s important for investors not to fall victim to their most recent perceptions. What often happens is something called rearview mirror investing, where investors will want to load up on those asset categories that have done really, really well – and they want to shun and avoid those asset categories that haven’t done very well.
Consider that when you’re rearview mirror investing, what you’re doing is buying into those asset categories that have done well already. So, you’re buying at a high. And you might be then selling those asset categories that haven’t done so well. So, you’re selling at a low, which is the opposite of what successful investing means longer term.
Joel: Do you have some examples of times when people might have sold out of things that did better the next year or bought into things that didn’t do as well?
Steve: Sure. Do you remember the euphoria in the latter half of the ‘90s? Everybody wanted to buy into those new-economy technology stocks. That didn’t end up very well for a lot of those investors.
There are also times, though, when you have a lot of opportunity in the market place. Consider that at the end of that recession after the technology crash in 2002, the worst performing asset class was small-cap growth by a country mile. Guess what the best performing asset class was in 2003?
Joel: Small-cap growth?
Joel: So what should I be doing, just ignoring the winners and losers that I see?
Steve: No, you don’t want to ignore the winners and losers that you see on your statements, but I think it gives investors a good time to revisit their overall balance and their overall allocation as we move into the next year.
One good strategy for investors is to resist that urge to load up on what’s done well and instead consider trimming their winners, locking in some of those gains and taking that money off the table.
Where do they go with the money that they take off the table? Well, look at those asset categories that might not have done very well this last year as an opportunity to buy into something that is a perceived better value.
Joel: So what you’re talking about is long-term plans for a balanced portfolio. What about shorter-term considerations, like where we are in the business cycle?
Steve: As much as we want to make sure that our allocation and our balance is appropriate to meet our long-term objectives, we have to be mindful of where we are in the business cycle and try to position our portfolios for the next six- to 12- to 18 months.
Consider that in 2015 growth stocks dramatically outpaced value stocks. What that tells pros like us is that we’re at the second half of the expansion phase of the economy. The baton got passed over to growth stocks, and that means we’re going to have some legs left here as we continue to move through this period of recovery. However, it’s also a caution that investors shouldn’t load up on growth stocks because the second we catch whiff of a recession, growth stocks tend to sink like a rock in water, Joel.
Joel: Which gets us back to balance.
Steve: Absolutely, Joel. I think this is a great time of the year for investors to revisit their allocations. Take this opportunity to trim some of your winners, don’t give up on what hasn’t done very well and make sure that you focus on the long term. Keep in mind that a slow and steady approach is going to help you get you to where you need to be.
Money Talk Video by Jason Scuglik and Peter May
(initially posted Jan. 4, 2016)