Strategists are constantly searching for high correlation relationships to guide investment decisions but the accompanying chart showing a zero correlation should guide the portfolio construction decisions of all resource sector investors. It shows the correlation in return rankings across all ASX-listed resources stocks in successive years. Cross-year correlations are typically zero. The results for 2015 illustrated in the chart did not differ from the results of prior years published in this January 2015 PortfolioDirect note: (VIEW LINK). If a ‘buy and hold’ strategy added value, relatively high returns in one year would be followed by above average outcomes in subsequent years. In reality, a stock with a return in the bottom 10% has as much chance of a top 10% return in the following year as one from any return decile, including the top 10%. The expected return would be the same whether an investor retained a sample of stocks from among the best or worst performers. Pressures from companies and financial advisers to ‘buy and hold’ and expectations of a progressive value build are all based on a false premise.
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