How often do we find ourselves looking at fund performance tables and picking out the funds that have performed the best over the last few years?
Have we found out how much risk that fund manager took to get those returns or whether the returns are the result of an investment strategy that has now come to an end? Probably not but we all want to be in the top performing fund, so let’s invest in it.
When giving investment advice, what we do is look for the boring funds or stock. It doesn’t really matter how you get on in the good times; it’s how you get on in the bad times that will largely determine how much money you will get back in the end.
Consider the case of two investments; one returns 10% each year for 10 years. The other returns 20% for 7 of those years and falls by 20% for the other 3 (the sequence of when the falls occur is irrelevant, the result is the same). Which investment do you think does better? The first investment outperforms the second one by 41% over 10 years.
But which one do you think everyone wants to invest in? The one that can brag about having greater returns for 70% of the time or can show huge short term annualised returns?
Investing is a long term strategy, especially pension funding. It is the consistent, boring funds that will get you where you want to go. Remember that next time you’re looking at those fund performance tables.