Financial advisors who constantly check the short-term performance of portfolios should not assume those efforts will lead to better investment decisions, according to a new report from Research Affiliates.
On the contrary, obsessing about a portfolio’s short-term performance can easily lead to chasing performance, buying recent winners and selling recent losers just before the tide is about to turn, writes Jonathan Treussard, author of the report and leader of the firm’s Product Management Group.
“Costly mistakes arise when we react to short-term performance assessments,” writes Treussard.
He’s not suggesting that advisors refrain from measuring short-term portfolio performance, but that they do so “within a framework that acknowledges short-term noise and encourages investors to stay the course” and “develop investment beliefs informed by, but not solely derived from, data.”
The key is to focus on long-term performance, which can differ sharply from short-term reports.
The report illustrates the point with a quilt-like chart showing the performance of eight different value strategies over individual five-year periods, highlighting the performance of sales-to-price, one of the eight.
That strategy aced all others in the 1968-1972 period, then slid to the second lowest performing strategy over the subsequent five years and subsequently then bounced on the performance scale during the remaining eight five-year periods. The dividends-plus-buybacks strategy is another illustration of an ever-changing performance stats from one five-year period to the next.
Longer term, however, the eight different value strategies returned between 11.4% and 12.8% annually – “a modestly narrow band,” says Treussard, – using three-year rolling periods from January 1967 through December 2017.
“As we de-emphasize the importance of short-term performance, we also gain an appreciation for the fact that long-term performance expectations have less noise built into them,” writes Treussard.