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Asset Class Performance and Timing the Market

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. 🙂

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  1. Ah, timing the market. It’s so hard to do. Which is why I’m one of those boring investors that just gets in on value stocks when they are relatively low, and holds on to them.

  2. Singapore Recession says

    Hi Mike,

    I loved the way you interpret the info and your sharp observations.

    great job!


  3. Here in the UK there’s a version of the US Motley Fool financial site. One of its early writers created a High Yield portfolio designed to replace an annuity for somebody looking to retire.

    One of the guidelines of this system was the you never sold shares you bought at the start — you bought and forgot about them, and enjoyed the income.

    The strategy became very popular and had its own discussion board, but huge numbers of the posts were about whether to sell specific shares. Even when a strategy had been designed specifically for people for non-dealing, people assumed they could tweak it to get a better result by adding in some trading (/churning) of low yielders for high yielders, etc.

    One problem with investment is we can rarely see over the long-run what would have happened if we’d followed a different path. Even with that graphic you link to, there are clearly many different permutations through all that data. You can only learn from other people’s retrospects.

  4. @Miranda: Sounds like a great plan to me! (Who says boring isn’t fun? 😉

    @Ren: Thank you. 🙂

    @Monevator: That’s a wonderful example. People are always looking for ways to beat the system. Apparently we just can’t keep ourselves from thinking that we’re smarter than everybody else.

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