The worst mistake investors can make is “performance chasing,” says Research Affiliates Chairman Rob Arnott in an interview on Bloomberg Television. Besides chasing performance—buying more of what’s done well while passing up on what’s not—Arnott considers focusing solely on opportunities within the U.S. another serious mistake.
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While he’s not bearish on cheap stocks, Arnott highlighted that many foreign stocks are relatively inexpensive, and international value stocks are “very cheap,” he stressed in the interview. And while there are many narratives about why not to invest outside of the U.S., especially in China and Ukraine, but domestic stocks are “priced at more than twice the valuation multiples of non-U.S. stocks,” he told Bloomberg.
In order to avoid making these two serious mistakes, Arnott advised looking at forward returns instead of past returns, with forward returns being a function of the yield, “the historical growth in income, and if there’s any valuation reversion towards historic norms” and whether that will hurt or help investors, Arnott explained in the interview.