Many people start out managing their own investments. But as their earnings and assets grow, their financial needs and challenges become more complex—and continuing to go it alone could prove costly in terms of investing miscues. Consider three common mistakes that can reduce returns and increase anxiety:
Investors may be tempted to cash out of the stock market to avoid a predicted downturn. But accurately forecasting the market’s direction to
time when to buy and sell is a guessing game. Missing only a brief period of strong market performance can drastically affect your lifetime
wealth.
For example, the chart below shows a hypothetical investment in the Russell 3000 Index, a broad US stock market benchmark. Over the entire
25-year period ending December 31, 2023, a $1,000 investment in 1999 turned into $6,449. But what if you pulled your cash out at the wrong
time? Missing the best week, month, three months, or six months would have significantly reduced the growth of your investment.
The Cost of Missing the Best Consecutive Days
Russell 3000 Index total return, 1999-2023
Investors may become enamoured with popular stocks based on recent performance or media attention—and overconcentrate their portfolio holdings in these companies.
One example is the rise of the large US technology companies known as the Magnificent 7 (Alphabet, Amazon, Apple, Meta Platforms, Microsoft, NVIDIA, and Tesla). But the chart below shows that many fast-growing stocks have stopped outperforming after becoming one of the 10 largest stocks in the US. On average, companies that outperformed the market on the way up failed to outperform in the years after making the Top 10 list.
Stocks on the Way Up, and After
Average annualized outperformance of companies before and after the year they became one of the 10 largest in the US, 1927-2023
You might be inclined to select investments based on past returns, expecting top-ranked funds to continue delivering the best performance. But can they maintain that outperformance? Research shows that most funds ranked in the top 25% based on five-year returns didn’t remain in the top 25% in the next five years. In fact, only about one in five equity funds stayed in the top-performing group, and only about a third of fixed income funds did. The lesson? A fund’s past performance offers limited insight into its future returns.
Percentage of Top-Ranked Funds that Stayed on Top
With a deep understanding of our client’s objectives, we provide tailored solutions to assist clients in achieving their financial goals.
New Horizon Wealth PTY Ltd ACN 632 726 222 is a Corporate Authorised Representative of Lifespan Financial Planning Pty Ltd
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ABN 23 065 921 735
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