A few years ago, a popular business radio station in Dubai interviewed me.

After we left the studio, one of the show’s hosts asked, “What are the best-performing markets now?”

After following corporate trends and trying to pick winning stocks for several years, he was finally ready to get serious with his Money.

He wanted to know which indexes were performing best at that moment.

I’ll share what I told him. But you might be more interested to know what I would say if he asked today.

As of mid-August 2023, America’s S&P 500 had gained about 17 percent. But that’s a slow jog, compared to a dozen other markets.

By comparison, Greece has raced like Usain Bolt, surging 42 percent. Other big sprinters that have thumped the US market include the Czech Republic, Ireland, Hungary, Mexico, Poland, Taiwan, Italy, Spain and France.

Barrels of money have rushed into these stocks.

But our instinct to chase what’s hot typically runs us off the track, or into the drainage ditch.

I’ll explain with a story, and some crazy-cool data.

Imagine meeting a money manager with long purple hair and a massive nose ring. They claim they can tap into divine powers.

“Prove it,” you say.

Over the next six weeks, they name the winning team or individual in every professional sports competition. So it’s true.

But this robe-adorned soothsayer won’t let you bet on sports. They will, however, promise you a long-term return of 29 percent per year, if you let them manage your money.

Sounds good, right?

Unfortunately, our DNA (or some base instinct) would lead most of us to fire this divine creature. Here’s how we know.

In 2016, former Drexel University finance professor, Wes Gray, published a story for Alpha Architect called, Even God Would Get Fired As An Active Investor.

In his research, he determined the best 50 performing large US stocks from 1927 to the end of 1932. He assumed a fictitious investor bought those stocks, and held them over that time period.

Dr. Gray also determined the best stocks from 1932 to 1937. He assumed the same fictitious investor then sold their previous stocks (or at least sold those that were no longer going to be winners) and held that new batch for another five years. He then assumed this process was repeated every five years. This investor would have averaged 29 percent per year from 1927-2016. (Based on their longevity, they were related to Methuselah).

For context, $1 invested in a broad US stock index would have grown to about $4,776 over those 90 years. But one dollar invested with a divinely powered money manager would have turned into $9 billion over the same time period, if it averaged 29 percent.

Now circle back to our DNA. Most of us would have fired this money manager, even if they didn’t have long purple hair and a giant nose ring.

That’s because most of us think short-term.

We want to know (much like that radio host) what the best-performing stocks or indexes are, right now. But that’s part illusion, part delusion. After all, when looking at the performances of any stock or market, we can only see the past. The present tense (in this case, what’s “performing”) does not exist. We can only see what has performed. We cannot see the future.

Yet, we love to chase the past, especially when it’s recent. That’s why stocks in Greece, the Czech Republic, Ireland, Hungary, Mexico, Poland, Taiwan, Italy, Spain and France are hotter than Taylor Swift.

But our tendency to chase recent, past performance would also likely make us fire a money manager with true, divine power.

For example, that divinely chosen portfolio of 50 stocks would have averaged 29 percent per year. But it had several bad years from which the majority might have bailed.

It dropped at least 20 percent on ten separate occasions. To gain that 29 percent per year, we would have needed to ride those bad years out.

Would you have had the mettle?

Or would you have moved your money to gold, real estate or sea urchins if they were “performing better.”

The chances are good, you would have. You are human, after all.

Dr. Gray determined a portfolio that averaged 29 percent a year with the power of hindsight. But nobody can see the future. That’s why you shouldn’t care what stock markets appear to be “performing best” right now.

Instead, stick to a globally diversified portfolio of index funds. It, too, will occasionally have bad years. But don’t chase your own tail and pursue something “performing better.”

That’s what I told my radio host friend.

When the divine portfolio averaging 29% would have fallen at least 20 percent

Source: alphaarchitect.com

 

Andrew Hallam is the best-selling author of Millionaire Expat (3rd edition), Balance, and Millionaire Teacher.