Ahhhh, the 1 billion dollar question! What’s the answer to make us all lots of money? What does everyone’s crystal ball say? What’s going to be the best investment for 2012?
Picking investments is no easy task. Picking the best investment for the next year, 3 years, 5 years or more is pretty much impossible. Why? Simply because no one can accurately or consistently predict the future.
Can we look to past returns?
If you take a look at last years market statistics (from PWL Capital or from Moneysense), Real Estate Investment Trusts (REITs) and Income trusts had a great year in 2011 especially compared to all the losses in the global markets. When you look at this kind of data, what does your gut tell you?
Which investment would you buy?
US Stocks +4.51%
Canadian Stocks -8.71%
International Stocks -9.66%
Emerging Markets -16.25%
For most people the most interesting investment on this list is the REITs. It’s human psychology to be attracted to the investment winners of the past. That’s exactly why we tend to chase performance. Our human brain can’t help but think in straight lines. When something goes up, we can’t help but think it will keep going up so we want to buy more of it. It’s also true of the opposite. When something goes down, we can’t help but extrapolate the trend and guess that it will keep going down.
Does chasing performance work?
My research shows chasing performance works 15% of the time but not 85% of the time. That’s just bad odds for successful investing.
Chasing performance is not a great investment strategy. Just use simple common sense . . . if it really were that easy . . . picking winners of the past to be winners of the future, why do we spend so much time losing money?
Chasing performance leads people to buy high, sell low when the only way to make money is to do the opposite (Buy low, sell high).
Don’t follow the herd
I love getting questions from readers and people who attend my financial workshops. What’s interesting is I can see herd mentality brewing when I hear the same questions over and over again, especially when it comes to investment themes.
In a few short weeks of this year, I’ve gotten a handful of questions on the merits of investing in REITs. To be honest, that was the motivation to write this post. When a lot of people ask about REITs, my gut tends to suggest that it’s the wrong time to invest in REITs.
Rebalance the plan
The winning strategy in my mind it to have a well diversified portfolio and rebalance the assets from time to time. In a year like 2011, where one category made 23.45% while another lost 16.25%, rebalancing would lead to selling some profits of REITs and buying some more emerging markets to bring the portfolio back to it’s original allocation. That’s the best way to systematically buy low, sell high.
My final thought
Predicting the future and financial forecasting is a staple in the investment industry. Money mangers do it, economists do it, financial advisors do it and yes even the media fuels it.
The problem is most forecasts and predictions are wrong and therefore useless. My favorite forecast comes from Dan Borolotti, the Canadian Couch Potato, “Of course, the crystal ball gazing is well under way for 2012. My only prediction for the year is that these forecasts will prove just as unreliable as always. Tune them out, build a portfolio for the long-term, and stick to your plan.”