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Step 9: History

Quarterly and Annual Reviews of Returns While I began this step with identifying the problem of investors focusing on short-term returns, they still should regularly review and benchmark the performance of their portfolio with an understanding of the contribution of the components to the total portfolio return. These reviews should be geared only towards understanding what occurred and should refrain from turning into a “market outlook” or a “portfolio recommendation.” As we learned in Step 4, there is no “going up” or “going down” with financial markets. There is only “gone up” or “gone down.” With rare exceptions, a change in a well thought-out asset allocation should only be in response to changes in the investor’s circumstances that affect his or her risk capacity. This will be discussed in greater detail in Step 10.

The Importance Of History Although all disclosure statements from investment advisory firms are required to state that “past performance does not guarantee future results,” studying the long-term past can better characterize both the risks and returns of asset classes and empower individuals to make better choices. Market history demonstrates the enduring nature of capitalism and demonstrates the benefits of being a long-term investor. The use of long-term historical data enables investors to build an asset allocation that meets their own risk capacity and equips them with the knowledge to withstand short-term volatility. For these important reasons, investors should rely on large sets of historical data when building an investment portfolio.

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