It also helps to demonstrate the cyclical nature of the markets, showing that one year's best performing assets can just as easily end up the next year's worst.
The trouble with chasing past performance – a case study
History shows us that no one asset class has continually outperformed over a sustainable period. So it's unwise trying to time the market by chasing short-term performance.
Let's look at the case of two investors, Sam and Alex.
Alex's strategy is to switch investments at the start of each year into the previous year's best performing asset class, i.e. `chasing past performance'. Over the 20 year period starting at the beginning of 1993 to the end of 2012, his $10,000 investment would have grown to $33,555, an average annual return of 6.2%.
However, Sam remained invested in a multi-asset portfolio over the same period. By contrast, the balance at the end of December last year would have been $50,793; an annual average return of 8.5%. That's a difference of almost 51 percent!
Choosing a diversified multi-asset portfolio can help smooth volatility and provide more stable returns over the long term.

About this chart: Case studies are for illustrative purposes only and are not indicative of actual performance over the quoted period. Sources for the asset classes and sample diversified portfolios are as follows: Australian shares: S&P/ASX 300 Accum Index, ASX All Ordinaries Accum Index prior to 31 March 2000. Australian bonds: UBS Warburg Aust Comp Bond Index, 1980-1989 Commonwealth Bank All Series All Maturities. International shares: Russell Developed Large Cap index (MSCI World Net Div Reinvested Accumulation Index (in AUD) prior to 1997) and International shares hedged: Russell Developed Large Cap index – AUD Hedged (MSCI World Net Div Reinvested Accumulation Index $A Hedged prior to 2000; MSCI World Local Currency Index prior to 1988). International bonds hedged: Barclays Capital Global Aggregate $A Hedged (formerly Lehmann Bros Global Aggregate Index $A Hedged. Prior to 2002, Saloman Smith Barney World Government Bond Index $A Hedged. A-REITs: S&P/ASX 300 A-REIT Index (ASX Property Trust Accumulation Index prior to 31 March 2000). The diversified portfolio is hypothetical only and is calculated by a weighted average of the asset class index returns shown in accordance to the following asset allocations. Case study performance calculations are based on geometric averages. 70/30 Balanced portfolio consists of: 32% Australian Shares, 15% Australian Bonds, 5% Cash, 20% International Shares, 10% International Shares $A Hedged, 10% international bonds, 8% AREITs.
Issued by Russell Investment Management Ltd ABN 53 068 338 974, AFS Licence 247185 ("RIM"). This document provides general information only and has not been prepared having regard to your objectives, financial situation or needs. Before making an investment decision, you need to consider whether this information is appropriate to your objectives, financial situation and needs. This information has been compiled from sources considered to be reliable, but is not guaranteed. Past performance is not a reliable indicator of future performance. Any potential investor should consider the latest Product Disclosure Statement ("PDS") in deciding whether to acquire, or to continue to hold, an investment in any Russell product. The PDS can be obtained by visiting www.russell.com.au or by phoning (02) 9229 5111. RIM is part of Russell Investments ("Russell"). Russell or its associates, officers or employees may have interests in the financial products referred to in this information by acting in various roles including broker or adviser, and may receive fees, brokerage or commissions for acting in these capacities. In addition, Russell or its associates, officers or employees may buy or sell the financial products as principal or agent. Copyright 2013 Russell Investments. All rights reserved. R_POS_Divers_V1F_1301.indd MKT/5089/0113
