Why following the winner might make you a loser

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One of the most common investment strategies is to back last year’s winner. All too often investors pile into the best performing asset class of the last year in the hope that success will be repeated.

But as the below table shows very rarely do asset classes consistently outperform and backing last year’s winner could end up making you a loser.

The table reveals the best performing asset classes for each financial year since 2008, and shows that not every winner repeats its outperformance in the following year.

Chasing last year’s winner (financial year returns)

Financial year returns 2008–2018

Source: Lonsec, Bloomberg, FE

Conversely, the table reveals that avoiding asset classes that performed poorly in the previous year can cost investors in the following year. For example, if investors had reduced their exposure to Aussie shares following a negative return in 2012, they would have missed out on one of the better performing asset classes in the subsequent two years (+21.9% and +17.3% respectively).

It’s a reminder that a well researched, diversified portfolio is better over the long term than chasing last year’s winners.

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