Don't chase your tail!

Everyone likes making money, but chasing past returns doesn’t work.  Can you pass this little quiz?                                                                                                                          





Now that the kids are back at school, it’s time for a quiz!  Don’t worry—it’s an easy one—there are only three questions.  There’s a moral at the end, so stay tuned.


Below are three actual strategies that one could have invested in.  We’ll show you how they fared; you tell us what you would have done.

Fund #1:

2009: Up 160% (“Fund of the Year”)

2010: Up 113% (“Fund of the Year”, again)

2011: Up 2%

Question #1)  Wow.  Those are some good numbers. Would you have wanted to buy it now?  If you did, here’s how the next few years went:

2012: Down 7%

2013: Down 27%

2014: Down 23%

2015: Down 33%

Not looking so good anymore.  Let’s try another:

Fund #2:

2009: Up 3%

2010: Up 9%

2011: Down 8%

Question #2) Kind of middling.  Not really impressive, especially given the market strength in 2009 and 2010, right?  Would you want to own that one?  Here’s how the next few years went:

2012: Up 37%

2013: Up 39%

2014: Up 15%

2015: Up 16%

That would have been nice.  One more try:

Fund #3:

2011: Down 3%

2012: Down 18%

2013: Down 11%

Question #3) This one sure doesn’t look compelling.  You’re probably ready to sell this one.  I mean, three down years!   Would you have continued to hold it?  Here’s what happened next:

2014: Up 62%

2015: Up 12%


The moral:

So what’s our point?  That it’s all random?  That everything merely reverts to the mean?  Vanity of vanities, all is vanity?  Nope.  The point is six-fold:


Manager selection is not about chasing performance. In fact, repeated studies show that doing so is a recipe for failure. So we don’t do it. No fund, strategy, index, or investment is a panacea.  Each has environments where it succeeds and falters. If one’s objective is to either “hit a home run” or “strike out”, bet on black and hope.  If one’s objective is to preserve and grow their capital consistently over time, make conservative and prudent allocations, not bets. We craft portfolios of complimentary, uncorrelated strategies that are able to participate in rising markets but are not dependent on them to produce returns. We allocate more (overweight) to markets exhibiting strong relative strength, and allocate less (underweight) to weaker areas, because trends tend to persist.  Don’t blindly buy what’s down because it’s down.

We understand each strategy, its utility to your portfolio, evaluate it in the context of its specific objectives, peers and alternatives, and make allocations that are based on sound theory and empirical evidence.


If you fared poorly on the quiz, fear not, as you aren’t alone—you’re normal.  Even professional pension fund managers are notorious for making decisions based on “rear-view driving”.  A study of pension fund manager selection shows that the managers they hire tend to underperform going forward while the managers they fire tend to outperform after they’ve been fired.  Choosing managers based on past performance is a poor indicator.  Proper due diligence is an extremely thorough on ongoing approach, going far beyond pulling up a Morningstar report, or just looking at 3-year and 5-year returns data.


Portfolio construction, and proper diversification, requires, logically, strategies that behave differently.  This means that some strategies will be down while others are up.  If everything was going up at the same time, one wouldn’t be diversified—they’d be holding many versions of the same thing.  For example, the fund listed as #3 (above), was down while your traditional US equity positions were making a lot of money during the US equity market rally of 2012 and 2013, but is up 14% over the last quarter while the S&P is down 7%.  Having part of your portfolio up 14% while traditional equities are down 7% is very powerful to your bottom line—at the portfolio level—and that is where one’s attention should be focused.


There is no easy shortcut to investment analysis. We identify and demonstrate legitimate sources of return and the degree of diversification, and then use the data to craft a portfolio that is appropriate for you—taking only the risk that is necessary to achieve your specific objectives while avoiding the natural behavioural biases that are so detrimental to investment success.


We have a long history and strong reputation for helping our clients preserve and grow their capital.  If you’re interested in discussing this subject in greater detail, please give us a call or send us a note.  As well, if you think that your friends, colleagues, or clients would enjoy taking this little quiz and would benefit from getting to know us, feel free to put us in touch.


For further reading on this subject, consider the following links:



Fondly, and for all of us,





Disclaimer: The opinions expressed in this report are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson GMP Limited or its affiliates. Assumptions, opinions and estimates constitute the author's judgment as of the date of this material and are subject to change without notice. We do not warrant the completeness or accuracy of this material, and it should not be relied upon as such. Before acting on any recommendation, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. Past performance is not indicative of future results. The comments contained herein are general in nature and are not intended to be, nor should be construed to be, legal or tax advice to any particular individual. Accordingly, individuals should consult their own legal or tax advisors for advice with respect to the tax consequences to them, having regard to their own particular circumstances.. Richardson GMP Limited is a member of Canadian Investor Protection Fund. Richardson is a trade-mark of James Richardson & Sons, Limited. GMP is a registered trade-mark of GMP Securities L.P. Both used under license by Richardson GMP Limited.