“Chasing Returns” leads to Worse Performance

by brendon on May 28, 2014

Overland Park and Kansas City investors should consider broader diversification in their financial planning and investment strategies.   Refer to the chart below and see the average annual difference between investor returns and fund returns;  it will always be lower…….. when attempting to invest in asset categories by looking at its most recent performance and “chasing returns”.    Making matters worse, the annual difference worsens as the size of the asset category reduces.

FP_OWS_Roth_Chart2

The solution:  own broadly diversified investment portfolios (at least 19 asset-classes) with the proper amount of stocks and bonds.   Use short-term maturity bonds to offset the risk of stocks and rebalance the accounts systematically.   Though simple, it’s not easy.

Work with an investment adviser to take the EMOTION out of your portfolio and make sure you know your worst-case scenario for downside risk;  ie-can’t handle a potential 25% loss—then reduce the exposure to stocks so that the potential loss of 10% won’t cause you to lose sleep at night.

 

 

 

 

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