Investors must rediscover their patience
I wish I could convince all my clients to look at their investing this way
I'll respect FT policy and provide just the link here.
For those who dont want to read the whole thing. Here's the takeaway:
- Momentum is seductive but in the long run creates high turnover and poor long termresults. ....But paradoxically since it provides the best potential for managers to satisfy the short term performance preoccupation of investors..both investors and their managers follow short term strategies...which are sure to produce poor long term results:
The saddest aspect of this is that long-term investors have been drawn into the momentum game. Symptoms of this include the emphasis on relative performance, leading to risk being equated with tracking error – a recipe for herding. Asset owners cannot duck responsibility for this. To keep their agents on a short leash, performance is invariably compared with a market value-based (in effectively herd-weighted) benchmark and funds are switched from recent poor performers to better ones, amplifying momentum.
- Price can deviate from value in the short term...investors focus too much on price and short term returns.
- Long term investors can benefit from price returning to value but only if they have a long term approach.
The authors have this advice for investors and their managers:
- Limit portfolio turnover to 30% of a portfolio (I would put the number much lower)
- Switch away from benchmarking to market capitalization weight indices which ae subject to distortions due to momentum ("bubble risk)
- Lengthen the time frame for evaluating portfolio performance.