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Seeds of Inspiration #6: Investing is Like Driving a Car: There’s a Reason the Windshield is Bigger Than the Rearview Mirror. In choosing Investments, Focus More on What’s Ahead Than on Past Performance.

05/14/2021

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By Lars Olson, CFP®, ChSNC™, CPFA, CAP®, CRPS®
President, Wealth Advisor

While vacationing in the Great Smoky Mountains, my wife and I drove the Tail of the Dragon – an 11-mile curvy roadway featuring 318 turns on a two-lane road.  This beautiful stretch is loved by motorcycle and sports car enthusiasts; however, we drove it in a 34 -foot RV.  With the panoramic view through the windshield, we fully experienced the beauty of our surroundings while cautiously maneuvering hairpin turns to ensure we safely made it through the pass.  I’m not sure we ever had a need to even look in our rearview mirrors.

Similarly, its best for investors to keep a forward-focus rather than dwelling on events of the past as the stock market is considered a leading indicator of future economic activity.

Past performance is no guarantee of future results is a common disclaimer in the financial services business, and with good reason.  The stock market winners from one year may not repeat as winners the next.  Let’s look at one recent example:

-        In 2020, US Large Growth Funds beat US Large Value Funds by the widest margin ever.[1]  The rationale is understandable – many of the growth stocks were technology companies which helped us work from home during the pandemic shutdown.  
 
-        In Q1 2021, US Large Value Funds beat US Large Growth Funds by the widest margin in 20 years.[2]  After terrible underperformance during the pandemic shutdown, US Value stocks rebounded as broad distribution of vaccine helped our economy to reopen.

Investors, like drivers, can experience a safer and more enjoyable ride by focusing their attention on what’s in front of them rather than what’s behind. 


[1] https://www.morningstar.com/articles/1017342/value-vs-growth-widest-performance-gap-on-record
[2] https://www.morningstar.com/articles/1033738/value-funds-post-best-quarter-vs-growth-in-20-years

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