EP 26 Performance Chasing & How To Avoid It

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Welcome back to Money Matters where I help guide you in becoming a better and more confident investor. In this episode I want to discuss performance chasing and why you need to do your best to avoid doing it! I’ve seen investors time and time again try and chase the shiniest objects veering from their plan, only to hurt the overall performance of their portfolios returns.

“Past performance offers no indication of future results”. Many investors have heard this before… Whenever you see a financial advertisement on TV, or read something in Forbes Magazine you come across this. Heck, I must put this disclosure at the end of most videos I do. The watch dogs of the financial service industry have deemed this so important that they require this disclosure to warn the general public! Even with this warning sign, I find some investors still can’t help themselves and still indulging in performance chasing.

We all have mental shortcuts that help us make the best decisions going forward. We tend to go with what we know, and what make us feel comfortable - who has performed the best most recently? Then there’s the herd bias that takes hold. No one like to feel stupid, or wrong, so a safe bet is to do what everyone else is doing. Then can lead investors to all pile into one company, or fund and drive the price up artificially higher, and then sell when they feel everyone else is selling, which is not a sustainable way to make money over time, and often time leads to losing money, or trying to time the market of when to buy, when to sell. Which is also a losing game for most of investors.

Take a look at this performance chart of different asset classes from 2005 – 2019, compliments of Fidelity.com. As you can see from this chart there is very little rhyme and reason to who the winners and losers are amongst the top 8 performing asset classes on an annual basis, yet investors year to year will change their approach to what they’re investing in trying to get in the action. And I don’t know about you but that’s enough to drive anyone crazy. Let alone try to keep your emotions in check.

In this video I want to give you some quick tips on how to prevent performance chasing and stay on track with your investments and your behavior. First off – stop strictly using performance screeners as they are always looking at past results, and more times than not, a mutual fund that has out performed well in the past isn’t going to continue to outperform the general markets going forward. According to Chartered Financial Analyst, Peter Lazaroff “among the top performing quartile of U.S equity mutual funds over a five-year period ending in 2012, 48% of those funds ended up in the bottom half of performers over the next five years while another 11% had to merge or liquidate” Which means you could decide to invest in a fund based on past results, just in time for the fund to underperform. Then what? Jump to another fund that’s overvalued and repeat the process. You can see how doing this again and again would be detrimental to your plan, not to mention a quick way to rack up additional transactional fees.

If you’re doing your due diligence and you really feel you align with a fund company or a fund manager’s investment philosophy really give it some thought as to why that is, so you then if you believe it to be true then you’ll be more apt stick with this philosophy for a longer time-line, limiting your behavior biases and desire to chase performance.

The best ways to beat the market overtime is discipline in your plan that you have create with your financial partnership. Properly diversifying your assets, and annual rebalancing all adding to the compounding of returns.

It goes without saying that all investors are seeking better long-term results for their own benefit, otherwise they wouldn’t be investing the first place. The problem doesn’t come from the fact that we think otherwise or don’t believe in performance, it’s simply that investors put too much emphasis on past results, when we know that indication for the future is blurry at best. A lot of this exacerbated from the noise created by CNBC and other financial experts who have made the right call one year out of the last twenty. So now they’re a self-proclaimed genius. At the end of that day, and especially in the financial world, there are a lot of opinions and even more egos – so why not quite the noise, and more importantly your mind and invest responsibly – in quality, well run companies, diversified accordingly, and take orders not from your emotions, but from your investment plan that you have created in response to your lifestyle, your risk level, and your family’s needs. A lot of this start with not chasing performance and focus instead on what you can control.  

Thank you as always for watching and giving your finances the attention that they deserve!