Good news about returns
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It’s human nature to be attracted to the investments with the highest returns (in this case the Aggressive Asset Allocation Fund). After all, we all want to make as much money as possible with our investments.
The problem with this data is the is no guarantee that the Aggressive Portfolio will always do the best. In fact, we have all heard the industry disclaimer – Past performance is no indication of future performance. We can see this when we look at data from the same fund back in 2008 when the markets were losing money.
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In this case, the Aggressive Portfolio fund has the worst performance instead of the best and most people are probably inclined to stay away from such a lousy performer.
Both these pictures are an example of snapshot performance. Looking at performance data at one point in time can be very misleading even over 5 and 10 year periods.
Related article: Making sense of Snapshot Performance
The urge to take more risks
Remember that when it comes to money and investing, psychology can be more powerful than logic. I talked to Nick, who has $58,000 invested in the Conservative Portfolio but thought he should change his investments to be more aggressive because he is behind in his retirement savings. He is 47 and plans to work till 65. With 18 years to retirement, one could argue that he has the time horizon to investing in something more aggressive if he wanted to.
Related article: 5 ways to measure investment risk
Buy Low, Sell High
One of the concerns with changing investments and moving money into a more aggressive fund is that most people want to do so after growth has already happened because we tend to think in straight lines. When an investment is going up we can’t help but hope and think it will keep going up. I’m not a market timing kind go guy but one might argue that we are now almost 4 years into a strong bear market and the likelihood of a correction or bear market gets greater and greater. It could be a risk of bad timing. Imagine moving the money from the Conservative Portfolio to the Aggressive Portfolio and then shortly after, the market drops significantly.
Related article: Buy Low, Sell High is the secret to successful investing
If you believe in re-balancing a portfolio, one might argue its a great time to take profits and invest those profits into under performing asset classes like bonds and cash instead of changing investments to be more aggressive.
Best of both worlds
To mitigate this risk of bad timing, one of the options it to leave the existing money in the Conservative Portfolio Fund and then direct new contributions of $392 per paycheque to the Aggressive Portfolio Fund. Investing regularly into a more volatile investment is called dollar cost averaging where market downturns can actually benefit you because you buy more units when the price drops.
Related article: The Power of Dollar Cost Averaging
At the end of the day, it’s Nick’s money and he can do whatever he wants. He could leave everything as is. He could switch the investment to a more aggressive option like the Aggressive Portfolio or he can take a middle of the road approach by leaving the current investment alone but redirect his monthly contributions to the more aggressive fund.