This year’s best asset was last year’s worst. Does the strategy of investing in the worst work? – 10/29/2023 – From Grain to Grain

Among the traditional investments available to the common investor, the Nasdaq technology stock index is the asset that has appreciated the most this year. It rises 20.8% in 2023, after falling 33.1% the previous year. When we observe a movement like this, we tend to think that investing in assets that have fallen a lot can be a good strategy, as they would tend to reverse the movement. It will be? I guarantee one thing, you will be impressed with the result.

To understand whether this perception is in fact true, I simulated the result of the strategy of always investing in the worst asset of the previous year since 2011.

I selected a universe of 10 traditional assets that investors can invest in either through an ETF or investment fund.

The selected assets were: CDI, IMAB-5, IMAB-5+, Multimarket Funds, Real Estate Funds, Dollar, Gold, Ibovespa, S&P500 and Nasdaq. For those less familiar, IMAB-5 and IMAB-5+ are the federal public bond indices referenced to the IPCA with maturities of less than five years and more than five years, respectively.

For example, the common investor could have invested in the Nasdaq index through the ETF traded on B3 with code NASD11. It was the worst performing asset in the universe above last year.

The result of the strategy surprised me and brings two interesting facts.

Whenever I receive a query about which assets would be interesting to invest in for protection purposes, I am asked about two in particular. I think you can already imagine what they are. Naively, investors associate the protection characteristic with them.

Although they have this reputation for protection, curiously, these two assets were the assets that appeared most in investment listings over the last 12 years. Remember that in this strategy, if an asset appears, it means that it presented the worst result among all.

The table below presents the list of assets you would invest in each year and the return you got from investing in the respective year. Note that gold and dollar assets are the two that have repeated the most. And they are precisely those that are known as protective assets.

Year	Active	Return
2023	Nasdaq	20.80%
2022	Ibovespa	4.69%
2021	Real Estate Funds	-2.28%
2020	Dollar	28.93%
2019	S&P500	28.88%
2018	Dollar	17.13%
2017	Dollar	1.50%
2016	Gold	8.03%
2015	Gold	-13.31%
2014	Gold	-2.19%
2013	Gold	-28.33%
2012	Ibovespa	7.40%

Note that only risky assets appear in the list. Fixed income investments and multimarket funds were the only ones that never appeared in the worst of the year category since 2011.

The investor who adopted this strategy since 2011 obtained a return of 72.12% in the period. This return was the second worst among the individual returns of the 10 assets.

Only gold lost from this strategy in the period. Gold’s return over the last twelve years was just 22.5% over that period.

This result is important to debunk two myths that I often hear. The first is that gold is an asset for protection. The second is that when you buy when it falls you don’t lose money.

Be careful when trying to invest in assets simply because they have fallen a lot. This strategy did not prove to be a winner in the long term.

Michael Viriato is an investment advisor and founding partner of Investor’s House.

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