January 19, 2015 Admin | January 19, 2015 When investing, chasing performance is a really bad idea. Why? Options?
4 thoughts on “January 19, 2015”
Chasing performance is like playing a losing game. Chasing performance is called reaching for alpha. It will never work. Stocks go up and stocks come down. Chasing performance increases the likelihood that you will buy high, get frustrated and sell low. A better options would be in invest in low cost mutual funds. Over time they are a better investment because of their low cost, low turnover, tax efficiency, and their approach of buying the whole haystack rather than just the needle.
If you try to chase performance you will almost always loose money. It is impossible to know when the value of a certain asset is going to go up or down. When you find out a stock is doing really well, whatever caused it to do well has already happened and it probably won’t go up more. The best thing you can do is choose and investment and put money in it on a regular basis, even if it is down.
When you chase performance you are saying that the past will repeat itself. You have no way of telling if past performance will have any affect on future performance. Just because someone won the lottery in the past has no barring on them winning again. If you see a fund that has a 5 star rating for the last year it has no promise that it will be a 5 star fund this year. You are better off buying index funds that cover everything. You are not betting on past performance that way. You are going with average returns of the total market. Just because the average return is lets say 8% on your fund you shouldn’t expect that every year, but you will likely be close over the long run.
There were many good comments there, gentlemen. Let’s review.
(1) Chasing performance is defined by identifying high past performers and then investing in them going forward.
(2) It fails because the future does not reflect the past. A high flying investment in the past can be a dog in the future. Recency bias is at play and reversion to the mean is bound to happen in the foreseeable future.
(3) Ignore past performance when selecting investments. It’s that simple AND ignore people who promote it. They are selling!
(4) Own markets all over the world as cheap as possible and that takes you to no-load index mutual funds. Rebalance on occasion when one asset class drops and rises more than you would like in relation to your entire portfolio.
(5) In any given year, one market will do better than another. No one can predict the future and that’s why we own the globe at the lowest possible cost. Ignore past performance. Onward!