Investing
Investing in the high flying stock or mutual fund is a very bad idea. Why? Alternative?
Investing in the high flying stock or mutual fund is a very bad idea. Why? Alternative?
Chasing performance (buying what is hot) is a really bad idea because of a couple of things called reversion to the mean (what goes up will come back down to its historical mean over time and vise versa) and recency bias (we are overly affected by what has recently happened, thinking it will continue to happen forever). High flyers should be avoided at all times. Take the time to learn more on this rather difficult issue by reading What Color is the Sky.
The alternative would include selecting investments that have underperformed recently as they will also revert back to their historical mean over time (we just don’t know when). Does this mean you should attempt to time the market? No, that is a sure way of losing money in most cases. This approach simply helps a person avoid those emotional triggers that ends up costing you a bunch of money by chasing what has already happened. Don’t do it!