Investing
Chasing performance is very easy to do when investing your money. What is chasing performance? Why is it a bad idea and how can you avoid it?
Chasing performance is very easy to do when investing your money. What is chasing performance? Why is it a bad idea and how can you avoid it?
Chasing performance happens when you buy “great” stocks or mutual funds (buying a 5 star fund is a good example of chasing performance) because they have performed well in the past. The past could be defined by a few days, a few months, or maybe a few years. This is a mistake and you can chalk it up to recency bias in many cases.
The past DOES NOT foretell the future. The wise investor knows this and they understand reversion to the mean (what goes up will come down and the same works in the opposite scenario).
So what is an investor to do? Own entire markets all over the world in stocks and bonds (mutual funds). Do it at a very low cost (no-load index mutual funds). Rebalance on occasion when one portion of your portfolio gets out of whack because of performance on the up or down side. Finally, stay the course and don’t let emotions drive your decision-making. Become the wise and efficient investor! Read What Color is the Sky for more details.