Back when I worked as a financial advisor, I always loved sharing charts like this one with clients/potential clients. (Go ahead and take a look at it. I’ll wait.)
The first thing that seems to jump out (at least to me and to many people to whom I showed the chart) was that if a particular asset class is at the top one year, it’s likely to be at the bottom the next year (and vice versa). Wow, a pattern! At first glance, it looks like we could perhaps beat the market by buying whichever asset class had just been at the bottom.
It’s obvious from looking at the chart that–after a while–an underperforming asset class will typically bounce back and have a period of outperformance. Unfortunately, it appears rather difficult to guess how long “a while” is going to be.
In 2 of the 8 years shown in the chart, the worst-performing asset class for the year went on to have the best performance in the following year. However, in 4 of the 8 years, the worst-performing asset class went on to perform either worst or second-to-worst in the following year. Hmm…perhaps buying assets immediately after they’ve had poor years isn’t such a great plan after all.
It’s clear that assets swing back and forth from excellent performance to poor performance. Everybody knows that. What makes timing the market so difficult is that you have to know how long the periods of good (or bad) performance are going to last. Good luck. 🙂