Continue reading...One of the biggest differences between individual investors and professional portfolio managers is how they view performance. Individual Investors tend to overvalue short-term performance, placing too much emphasis on one, three and five-year returns. Professional portfolio managers place most of their analysis on seven to 10-year periods, since they coincide with a full market cycle. This is a marked difference and it can greatly change long-term results. To view how significant the differences can be, let’s take a look at 20 years of past performance.
We will start by looking at the diversification chart below, which shows how various asset classes have performed. (The S&P 500 is represented by the category large growth stocks). Notice that over the short-term, during 1995-1999, the large growth stocks category grew approximately 38%, 23%, 36%, 42% and 29% per year. Monetarily, if you had invested $100,000 in 1995, by the end of 1999 you would have...
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