Nick Samouilhan, multi-asset manager at Aviva Investors, warns that people’s investing experience can be their own worst enemy when constructing portfolios.
In their book Soccernomics, Simon Kuper and Stefan Szymanski recount the story of a study done at an unnamed English football club regarding the most effective way to take a corner. Looking at hours of footage, they found corners swinging into the near goalpost (inswingers) were much more likely to result in a goal than ones swinging out (outswingers) towards players in the box. Analysis done, they showed the results to the club’s manager, an ex-player. He promptly rejected the advice without questioning the data. He just “knew” outswinging corners were more effective and refused to change his tactics.
The evidence was pretty clear that inswinging corners are more successful than outswinging ones at creating opportunities for goals. However, and here’s the point, corners that swing out and are either volleyed or headed in from the box are more memorable than scrappy goals going in at the near post. The difference between forgettable, yet more prolific, inswinger goals and memorable, but less successful, outswinger goals explains why the coach “just knew” which type of corner was better.
Misguided Belief in Equity Returns
The disconnect between reality and people’s experience (or, more importantly, recalled experience) is not restricted to football managers. If you ask a fund manager or a financial adviser what their main investment beliefs are when constructing a portfolio, you are likely to hear the following dictum: “equities for the long term”.
That investors “know” equities are likely to deliver higher returns than cash or bonds over the long term is the main justification for an equity bias in so many portfolios. Unfortunately, too many investors have yet to grasp the dictum is only true for specific periods.
US equities, as measured by the S&P 500 index, delivered a ten-year annualised return of around 4 per cent between 1910 and 2000. The return from US equities was almost zero between 1965 and 2000. By contrast, anyone investing in US equities from 1990 to 2000 enjoyed annual returns of well over 15 per cent.
While long-term equity returns have been strong at times, there are plenty of occasions when ten-year equity returns were below 5 per cent and comparable with bonds. Indeed, those investing in US equities in the late 1920s or the late 1990s lost money over the next decade. At best, the record of investing in equities over the long term is one of mixed returns, though a positive bias overall.
Like the footballer only recalling great outswinging corner goals, the collective psyche of investors is informed by their own experiences. During the last quarter of the 20th century, equity returns were particularly strong. This coincides with the period when most of today’s fund managers, financial advisers and investors started investing. If they had started investing in the 1930s, 1965 or late 1990s their experience would have been very different.
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