November 4, 2013

Chasing performance is a TERRIBLE way to invest your money. What is chasing performance?

7 thoughts on “November 4, 2013”

  1. Karen says:

    Chasing performance is basing new investment decisions on a stock or fund past performance.

  2. Steve says:

    Karen’s comment is spot on. Examples would be Telsa (TSLA) and 3M (MMM).

  3. Alex Christianson says:

    The performance of a stock or fund is determined by how well it performed in previous years. This attracts plenty of people to that investment. Likely it is expensive at this moment as well. However the superbowl has already been played, and last years winner may not be at the top for next years best performing fund. It is a terrible way to invest because you are buying the winners (buying high, the coat’s price has went up) and it is unlikely it will perform that well anytime soon. Also chances are the expense ratio is higher than those that can be found at Go there for your investment desires!

  4. Mike Finley says:

    Well said, Karen. Let’s recap.

    Chasing performance (making new investment decisions based on what has happened in the past) is a terrible way to invest your money because PAST PERFORMANCE DOES NOT EQUAL FUTURE PERFORMANCE. Actually, it can do the opposite as the high flyers come tumbling down to earth and the bottom dwellers rise up to catch their breath. Reversion to the mean is at play.

    What is a person to do? Avoid chasing after the latest and greatest performers (5 star mutual funds for example). This means identifying the right asset allocation that is right for you (70% stocks and 30% bonds for example) and then sticking with it, and that means ignoring others who want you to jump ship and invest with the “hot” new investment. Ignore that message and you will be on your way toward being the wise and efficient investor.

  5. Mike Finley says:

    You and I were commenting at the same time, Alex. Your viewpoint is right on target. Well said my good man.

  6. holly says:

    How do I know when the small cap is doing well again? What should I check? How does one reconcile the concept of reversion to the mean with some necessary changes that have to be made along the way? Thanks

  7. Mike Finley says:

    The question on small-cap is not a simple one, Holly. Small-cap should be part of your asset allocation (if you choose to follow the research conducted by Fama and French, which I recommend you do). Rather than predicting when small-cap is better than large-cap, it is wiser to focus on selecting the percentage of small-cap in your portfolio in relation to the percentage to large-cap. Not a perfect answer, but an honest one. Read any book written by William Bernstein to help you with this matter.

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