I found an article that went nationwide in Wednesday’s News papers interesting.
The centrepiece of this article was data obtained from SuperRatings in tabular form that purports to show that if a super investor invested $10,000 into superannuation on 1 July 2002 and switched on 1 July of every financial year into the best performing asset class of that year, they would have amassed a total investment of $37,000-odd by the end of June 2012.
(Source: The Advertiser)
The survey appears to ignore the impact of tax, transactional costs such as entry fees, switching fees, buy/sell spreads and contributions tax as well as earnings tax. However, the end result is impressive.
The online article, by the way, has a great graphic that you can click on to show how fast one’s savings would grow, compared to other investment options, by investing in the best performing asset class.
Obviously, this performs well in excess of investing in any of the asset classes at the start of the period, and leaving your money there.
There is, of course, no mention of the small issue that prevents investors from investing this way: You pretty much have to be either magically psychic to predict the best performing asset class for a particular year, or be in a position to rig the all of the world’s financial markets to obtain a certain result.
What is more likely, is that an investor will look at the previous year’s best performing asset class, and invest in that instead. I’ve seen this scenario run a few times over the years, and usually the following happens: A strategy that involves switching to last year’s best performing asset class will (apparently) normally underperform a strategy where the investor invests in last year’s worst performing strategy.
I thought I’d have a play around with the figures as provided. I have to apologise to you all, because these figures haven’t made it into the online version of this article, and I’m working from one that went out in this morning’s copy of The Advertiser and has the figures in for each financial year for a bundle of different asset mixes, as well as a few different asset classes, specifically,
· Australian equities;
· Property
· Australian bonds
· Cash term deposits
So I ran a few scenarios, based on SuperRatings figures. Remember, we know that the best possible outcome from the data provided is to start with $10,000 and finish with about $37,000.
We also know that buy-and-hold investors who start with $10,000 in one option and leave their funds in the same option for the entire period performed as per the chart above. It doesn’t look like much of a spread, but in percentage terms, there’s a bit of difference between Australian equities (average return 6.22%) and cash term deposits (average return 4.38%).
The worst possible outcome, where one is unlucky enough to select the worst performing asset class on July 1 each year, resulted in turning one’s $10,000 into $6,670, or if you like, an average return of -3.97%. Not really surprising.
The worst possible outcome, where one is unlucky enough to select the worst performing asset class on July 1 each year, resulted in turning one’s $10,000 into $6,670, or if you like, an average return of -3.97%. Not really surprising.
But here’s where you find the pitfalls of cherry-picking a particular 10 year period to base your analysis. Our highly likely scenario of an investor who picks last year’s outperformer, when compared against a contrarian investor who picks last year’s underperformer, resulted in a reversal of the accepted normal position, where the following occurred, assuming that they change every 1 July:
· Last year’s outperformer: $20,200 (7.28%)
· Contrarian: $12,700 (2.39%)
(I'm only going to 3 significant figures)
Apparently, this shouldn't usually be the case, so I've decided to look at this in some more detail. To put this in perspective, switching asset classes, based upon the previous year's top performer, outpaces the top performing asset class (Australian equities) if you were to have bought and held that asset class for the entire 10 years. The conventional wisdom is that investing in a previous year’s underperforming asset class should outperform the opposite strategy, as a rule. It’s similar to the Dogs of the Dow.
Apparently, this shouldn't usually be the case, so I've decided to look at this in some more detail. To put this in perspective, switching asset classes, based upon the previous year's top performer, outpaces the top performing asset class (Australian equities) if you were to have bought and held that asset class for the entire 10 years. The conventional wisdom is that investing in a previous year’s underperforming asset class should outperform the opposite strategy, as a rule. It’s similar to the Dogs of the Dow.
I'm quite interested in this relationship, so I’ve run this with non-super data from Vanguard over four different ten year periods, and come out with SIMILAR RESULTS FOR EACH PERIOD!!!
Obviously, I've done something wrong. I have to take a close look at my modelling, because this kind of consistency is usually an indicator that I’ve really mucked something up.
Obviously, I've done something wrong. I have to take a close look at my modelling, because this kind of consistency is usually an indicator that I’ve really mucked something up.
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