Bad investment research is useless

Anyone who knows me knows how I feel about research when it comes to investing. Good research leads to good decisions. It will not guarantee success but it can help you to avoid big mistakes.

At one of my recent workshops, I had someone come up during the break after talking about investment research and he said his advisor’s research is looking at 10-year returns as opposed to 1, 2, 3, 5-year returns. The advisor thinks looking at the long term is better than looking at the short term.

Although this is very common thinking, here are some significant flaws with this approach:

  1. Past performance is no indication of future performance. Most of us get tricked into thinking that past performance is a primary indicator of future performance because we can’t help but think in straight lines. When something is doing well, we can’t help but think they will continue to well. When something is doing poorly, we also cannot help but think they will continue to do poorly. Just because investment had a good track record for the past 10 years is certainly not a good indicator that they will have good performance for the next 10 years. Here’san article I wrote a long time ago the message is still relevant.
  2. Single dimension analysis. When it comes to investment research, a multi-dimensional approach is better. Looking at the 10-year returns is a prime example of single-dimensional analysis. Even looking at other performance time frames like 5 years or 3 years is still looking at performance. Proper research requires an evaluation of other factors like fees, taxes, mandates, etc. Here are five things I like to look at when I research.
  3. Snapshot performance. Although 10 years is a long time, the data still shows a representation at a specific point in time. For example, you can look at an investment on December 31 and the 10-year return might show 8% compounded over that 10-year time frame. Six months later, that same investment might show a 10-year return of only 5%. Same investment but you happen to look at it at two different times with two different start points and two different endpoints. Here’s another old article from the vaults highlighting some examples of snapshot performance.
  4. Who holds investments for 10 years anymore? Although the industry mantra for investing is buying and hold, people just are not holding investments for a 10 year period anymore. I’ve read and heard that mutual funds are held on average for less than 2 years and stocks are held for less than 13 months. I’m not sure if the data is accurate but I’m pretty sure the average hold is not 10 years. The industry and quite frankly the world is too dynamic. With a proliferation of new products, investors need to give their portfolios a little more attention and recognize that times change and products change
  5. Who needs the advisor for that research and advice? I am a very pro advisor. I think most people need financial advisors to help them but at the same time, I think preaching buy and hold for 10 years is a lousy value proposition. I believe buy low sell high is the only strategy guaranteed to make money and to do that, you must recognize the sell is just as important as the buy. I believe everyone needs to sell a strategy.

Leave a reply

Your email address will not be published. Required fields are marked*