Chasing Performance – Six Examples to Learn From

May 23, 2019

Who doesn’t like a story? With investments, a good story almost always accompanies chasing a hot investment. In our view, chasing performance is a dangerous game and extremely difficult to win. When it comes to investing, we believe there are no shortcuts. Higher returns equal higher risk and a greater chance of loss as a result.

Yet when you read articles, listen to the media and talk to your average investor, it appears like everyone chases. They chase hot strategies based on prior success stories. It seems like everyone except you swims in a bathtub filled with C-notes. Suddenly diversification and focusing on the long-term feel like a bad idea.

With the myriad of experts touting their can’t-miss strategies and success stories, it’s hard to ignore. But what often gets overlooked are the risks. They are either glossed over or never mentioned, with no accountability or recourse. The only consequences are to those who lose money by acting on them.

We reviewed several hot investment themes from recent times to see how they performed. Spoiler alert – the results aren’t good.

Gold

  • Not long ago, experts recommended buying gold due to a lack of confidence in currencies, fiscal irresponsibility and fears of runaway inflation. In a world of mistrust, gold is often viewed as a safe haven.
  • For ten years prior to its peak in September 2011, gold prices rose over 500%. Since then, they have dropped nearly 30%.
  • A $10,000 investment in the S&P GSCI Gold Index from 9/1/11 through 5/13/19 would be worth $6,794.

Gold Miners

  • If gold was set to go through the roof, then companies focusing on gold production should also surge, correct?
  • Over the same timeframe 9/1/11 to 5/13/19, the cumulative total return for the HUI Gold Index = -74.6%.
  • Growth of $10,000 9/1/11 to 5/13/19 = $2,534.

Silver

  • Silver and gold go hand in hand, right? The S&P GSCI Silver returned 82% in 2010.
  • Cumulative Total Returns since then = -59.8%.
  • Growth of $10,000 from 1/1/2011 to 5/13/19 = $4,022.

MLPs

  • Master Limited Partnerships (MLP) generally are involved in the transport, storage and processing of energy commodities. With the allure of high yields combined with easy access through ETFs and Exchange-Traded Notes (ETNs), they caught the attention of yield-hungry investors.
  • Growth of $10,000 for the Alerian MLP Total Return Index for the 10 years ended 5/13/19 = $8,959.
  • Comparatively, an investment in cash, which yielded close to zero most of the decade, would have performed better.

Hedge Funds

  • With their exclusivity, potential for alpha generation and diversification benefits, both pensions and individuals alike flocked to these.
  • The returns, however, have been less than stellar. According to the “Swedroe: 2018 Report Card for Hedge Funds” by Larry Swedroe1, the HFRX Global Hedge Fund Index returned only 1.5% for the 10 years ended December 2018. Five-year Treasuries earned 2% per year.
  • Growth of $10,000 for the same 10-year period at 1.5% = $11,605.

Bitcoin

  • The most recent hot trend, Bitcoin was the only thing you heard about when it was going up. Once it fell, it was no longer newsworthy.
  • And fall it did. Despite a recent rally, the NYSE Bitcoin Index remains down 46% off its December 2017 high.
  • Growth of $10,000 from 1/1/2018 to 5/13/19 = $5,367.

There is always going to be a new, hot investment out there.  However, as stories remind us, getting into an investment after it has already been hot can lead to tough outcomes looking ahead. These examples reinforce our belief in diversification, managing risk, and having a long-term focus. As Warren Buffet once said: “It is not necessary to do extraordinary things to get extraordinary results.”


1 ETF.com “Swedroe: 2018 Report Card For Hedge Funds” from February 4, 2019

The S&P GSCI Gold Index, a sub-index of the S&P GSCI, provides investors with a reliable and publicly available benchmark tracking the COMEX gold future. The index is designed to be tradable, readily accessible to market participants, and cost-efficient to implement.

The NYSE Arca Gold BUGS Index is a modified equal-dollar weighted index of companies involved in gold mining. BUGS stands for Basket of Unhedged Gold Stocks. It is also referred to by its ticker symbol “HUI”. The HUI Index and Philadelphia Gold and Silver Index are the two most watched gold indices on the market.

The S&P GSCI Silver Index, a sub-index of the S&P GSCI, provides investors with a reliable and publicly available benchmark for investment performance in the silver commodity market.

The Alerian MLP Index is the leading gauge of energy infrastructure Master Limited Partnerships (MLPs). The capped, float-adjusted, capitalization-weighted index, whose constituents earn the majority of their cash flow from midstream activities involving energy commodities, is disseminated real-time on a price-return basis and on a total-return basis.

The HFRX Global Hedge Fund Index is designed to be representative of the overall composition of the hedge fund universe. It is comprised of all eligible hedge fund strategies; including but not limited to convertible arbitrage, distressed securities, equity hedge, equity market neutral, event driven, macro, merger arbitrage, and relative value arbitrage. The strategies are asset-weighted based on the distribution of assets in the hedge fund industry.

The NYSE Bitcoin Index aims to represent the value of (1) bitcoin in U.S. Dollars (USD) as of 4 PM U.K. time each weekday. The Index is calculated sourcing data from qualified exchanges, currently GDAX and itBit. Only bitcoin transactions conducted in USD are eligible to be input into the Index.

Past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk.  Future performance of any investment or wealth management strategy, including those recommended by Balasa Dinverno Foltz LLC (BDF), may not be profitable, suitable for you, prove successful or equal historical indices.  Historical indices do not reflect the deduction of transaction, custodial or investment management fees, which would diminish results.  Any historical index performance figures are for comparison purposes only and client account holdings will not directly correspond to any such data.  BDF clients must, in writing, advise BDF of personal, financial or investment objective changes and any restrictions desired on BDF’s services so that BDF may re-evaluate its previous recommendations and adjust its investment advisory services.  BDF’s current written disclosure statement discussing advisory services and fees is available for review at www.BDFLLC.com or upon request.