Many investors take great heart from the recent good performance of something they are looking at investing in. If the asset went up solidly in the previous year, the conclusion is that “it is on the way up”.
But all assets have a long term trend performance which we should be very aware of when entering this investment. To make the point, let’s look at an example of International shares which have a long term return of about 9%.
If we get excited to buy once they have produced a return of 18% one year but then the long term average kicks in, the chances are their performance in your first year of owning them is 0%.
However if you more bravely buy them after they have just lost 9% in a year and the average cuts in, they will return 27% in your first year of ownership. That’s a huge reward. Obviously it may take more than one year for the average to assert itself, but hopefully you get the point.
By the way, international shares (which we had been tipping for some time as they had under performed for many years) went up 48% in 2013.