I happened to look at a journalistic website called money to the masses. It talked about how to invest £100,000. It also was nudging people to buy a portfolio they had designed. It was called the 80/20 Portfolio. The 80/20 had “outperformed. Take a look at the graph by following the link.
If you were an investor, it clearly shows outperformance. Job done. Where do I sign! Hang on….
A closer look at the benchmarks, you would presume the comparison is based on similar risks. Logic would say, if 2 drivers had the same car but one was better than the other, then skill was in evidence. But if one car had more power, it is not a fair comparison? It’s the same with investing, are you comparing like with like.
Even presuming that the 80/20 fund as shown did outperform, what is a reasonable time frame for measurement? Were longer or shorter time periods showing the same outperformance in evidence? If not, then consistency does not exist.
Then there’s another question. Still, on the basis the fund did outperform, how did they do it? What decisions are they making to ensure outperformance exits? A graph that shows outcomes is of no benefit unless you understand how the outcomes were achieved. If it’s some form of ‘magic potion’ or ‘secret investment sauce’, it means you have to trust what they are telling you, 100%. Are you prepared to give that level of trust?
Ask yourself another question, if the graph didn’t show outperformance, would you still invest?
Graphs can be manipulated to sell a story. As an investor, it’s your job to be skeptical. By the way, it’s why the FCA issues the warning’ past performance is not a guide to future returns.
In your portfolio, what graphs are you shown? Don’t just accept what has been presented to you; prepare your own graphs, especially through different times frames, and use various benchmarks to help your thinking. As you become more informed, you’ll ask better questions of those who delegate the management of your money.