Investing in the rear-view mirror

Here we explore why relying on past performance can be misleading and how understanding this can lead to more informed investment decisions.

Financial markets are influenced by a multitude of factors – economic conditions, political events, technological advancements, sentiment, and even natural disasters. These factors interact in unpredictable ways, creating a constantly changing environment and different investment regimes. For instance, a fund that performed exceptionally well during a period of economic growth might struggle during a recession. The 2008 global financial crisis serves as a perfect example. Investments that had consistently delivered strong returns up to that point suddenly plummeted, fundamentally altering their future prospects.

The dot-com bubble of the late 1990s is a further example. Technology stocks soared as investors rushed to invest in internet-based companies. Although, when the bubble burst in 2000, those same stocks crashed. Investors who assumed that the past rapid growth would continue indefinitely faced significant losses.

Individual companies can undergo changes that affect their future performance. Management changes, new competition, or shifts in consumer preferences can drastically alter a company’s fortunes. Consider Nokia, which dominated the mobile phone market in the early 2000s. Despite a history of strong performance, it failed to keep pace with the innovation brought by smartphones and subsequently lost its market leader position to companies like Apple and Samsung. Investors relying on Nokia’s past performance would have missed the critical inflection point where its future prospects changed. Market sentiment also plays a crucial role in investment performance. Sentiment can be influenced by factors such as media coverage, investor mood, and social trends.

Understanding that past performance doesn’t guarantee future results is essential for building a resilient investment strategy. Diversification, risk assessment and a focus on long-term goals and investment ideas rather than short-term gains are crucial. By spreading investments across various asset classes and sectors, investors can mitigate the impact of poor performance in any single area. Regularly reviewing and adjusting the investment portfolio in response to changing market conditions ensures that the strategy remains aligned with investment objectives. Our widespread WLI portfolios are rebalanced every 12 weeks.

When thinking about a stock’s fundamentals, a company may experience a period of robust earnings growth, but this improvement might not be immediately reflected in its share price. Market participants can be slow to react, or broader market conditions might overshadow the company’s individual success. Over time, as more investors recognise the company’s strong performance, the share price may start to rise, aligning with the earnings growth. Conversely, there are instances where share prices rise ahead of earnings due to speculative behaviour, only to correct later when fundamentals do not support the inflated prices.

In conclusion, while historical data can provide valuable insights, it should not be the sole basis for making investment decisions. The drivers behind stock performance are ever-changing, and a strategy rooted in flexibility, diversification, and continuous assessment is far more likely to withstand the test of time. Our investment managers at LGT, are forward-looking in their investment approach. This perspective often means identifying opportunities that others may overlook, including investments in funds that haven’t just had a period of strong short-term performance. By focusing on future potential rather than entirely on past performance, they aim to uncover value where others may not see it, positioning our portfolios to benefit from emerging growth opportunities.

For more information on our investment philosophy or WLI Managed Portfolios please get in touch.

Investing in the rear-view mirror

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