Purchase after strong performance periods (when estimates are higher and expected returns are now lower) and sale after poor performance periods (when estimates are lower and expected returns) is not a successful investment recipe.
However, many individuals invest due to the prejudice of duration-the detention to overwhelm the latest events/trends, designing them in the future, while ignoring long-term evidence-and this is how they do it. Disciplined investors do the opposite. They rebalance to maintain their well -thought -out allocation of dangerous assets.
Avoiding the prejudice of the review requires that investors have sufficient patience to maintain discipline, staying course through poor performance periods. The prejudice of the review also causes investors to ignore historical evidence, which makes it clear that all risk assets go through long periods of poor performance. Such periods are not a reason to avoid a dangerous asset. Rather, they are a reason to diversify to avoid all or most of our eggs in the wrong basket.
bias
The following table shows the annual returns of the main classes of global capital asset over the last 17 years (2008-2024). The superior performance of the large S&P 500 lid index has led many investors to question the wisdom of diversifying portfolios to include international and developing markets and small and US value shares.
Before undergoing review prejudices, consider how the world of investment looked on January 1, 2008. The table below shows annual returns of the same large global wealth classes over the previous eight years, 2000-07.
During this period, the S&P 500 was the worst capital class, with developing markets were the best. In addition, small and high value reserves exceeded the large S&P 500 lid index.
However, we have to consider how the investment world viewed investors subject to the review prejudices on January 1, 2000. The table below shows the annual returns of the main classes of global capital resources during 1995-1999.
Investors undergoing review prejudices would be the buyers of the S&P 500, who continued to be the worst performer in the other regime (2000-07) and would avoid low-value shares and especially developing market reserves, which turned out to be the best performers.
The following two examples provide strong evidence of the importance of understanding that all risk assets experience long periods of poor performance. As the following graph illustrates, the S&P 500 index has experienced three periods at least 13 years when he underestimated the Treasure without risk without risk.
These three periods in total 45 of the last 96 years (47% of the period). Of course, this means that it provided spectacular returns in the other 51 years. However, investors would have been able to gain those big returns only if they avoided the prejudice of the review and stay on the course. The most famous example of the review of the review is probably the 1979 cover Business week titled “Death of Net Capital”.
It is also noteworthy that each of the periods preceding three above were very strong performance periods for S&P 500, driven by numerous extensions (as has been the case over the past 17 years). Those who do not know their story are doomed to repeat mistakes.
The last example is even more powerful as it covers the 40-year period 1969-2008. Note that over the past 40 years, the best performers over the past 17 years underestimated US long-term government bonds (20-year maturity), which is without risk of pension plans with long-term nominal liabilities (such as pensions).
Ratings are important
As mentioned earlier, numerous extensions often promote superior performance, resulting in more thanformers to have much higher estimates and, thus, expected lower returns. With this in mind, let's look at the current relative assessments of American and international shares. As you can see, the Profit (E/P) yield of Shiller Cape 10 (cyclical price regulated ratio), which is the best predictor we have for real long -term returns, is only 2.7% for the US, but is 5.5% for EAFE index shares, and 7.1% for developing market resources.
Similarly, the relative overcoming of large US shares has resulted in their estimates of small value reserves that are close to historical peaks. Previous peaks, such as what happened in March 2000, have set out premiums of great value. The result is that investors have to wait to move forward, the small value premium is likely to be greater than the historical average.
Taking investors
The prejudice of the review makes us forget the lessons that history offers. First, superior performance is often driven mainly by numerous extensions, leading to high estimates and expected returns of the lower future. Those who are subject to the review prejudices instead expect future returns to look like the last past. The second lesson is that historical evidence demonstrates that trying to make the time of these regime shifts has been a game of losers for active managers. Thus, the winning strategy is to remain disciplined, buying after periods of poor performance when the expected returns are now higher and sold after superior performance periods when the expected returns are now lower.