Index Investing

[level13]

Why are we not seeing 8% p.a. type of returns for STI?
Or place your money with active managers who have proven able to do so.

The 8-yr period may be too short a time-frame to look at the STI long term return of 8%.

There was a paper that came out in Y2017 (see attachment) which stated that investors should urgently stop relying so heavily on past performance to
choose investments. Performance chasing is a reliable path to poor investment results. High chance that fund managers who do very well in the past 5 years will have mediocre results in the next 5.

1) Whether the 8 year (9 actually) period is too short to determine the long-term returns of STI -- or for that matter, any securities -- I do not have a definite answer. What I do know is that I do not have that many 8-year periods to make wrong bets.

The further we are willing to stretch our time horizon, the higher the probability of higher returns. If we increase the period under our calculation to the next 8 or 16 years, we might see STI reverting to its 8% p.a. returns. Certainly, many Singapore stock investors will be delighted if the market trades at a higher multiple.


2) A fund manager that has outperformed in the past 5 years is more likely to underperform in the next 5 years because of the cyclical nature of the markets. For example, a long-only fund will face difficulty of making (any) returns in 2018 because of the general downtrend in the market.

An investor looking to pick a fund manager has to understand that funds usually outperform during periods of general uplift in the markets. So when I invest in a fund immediately after it has reported huge returns, it means that I am buying during a period when the markets are higher. And as we know, buying when markets are high will result in poorer subsequent results. 

Perhaps a strategy for a fund picker will be to invest in a fund when its short-term historical returns lag its long-term historical returns, by a lot. This assumes that the fund manager is not a one-hit wonder.

If we are to believe that a fund is able to return high returns in the next 5 years after it has done so over the past 5, we must then believe that the fund manager is able to long when the market is at a bottom, and short when the market is at a top, every year. Or, we believe that the fund manager is able to concentrate heavily into those few stocks which turn out to be the year's winners, every year. I don't think either of these expectations are reasonable, and therefore, I don't think it is reasonable for investors to expect high returns to be generated in a linear-ascending fashion.

On pt 1, agree that we don't have many 8-yr periods. In the long run, we are all dead.
That is why i always believe in having a portion of wealth in index funds and the rest in value counters.

On pt 2, i find it difficult to find the right party to put my money with. Hence, i decided to do it on my own.
My thinking is -> why paid someone to lose money? i might as well lose it on my own accord.