“Don’t always run with the crowd. There’s value in being counterintuitive.” – Warren Buffett
According to Investopedia, researchers in behavioural finance found that 39% of all new money invested into mutual funds were invested into the 10% of funds with the best performance from the previous year.
More often than not, prospective clients with limited knowledge of investing will tend to approach investing with this behavioural bias popularly called, “chasing performance,” or “chasing winners.”
While some may succeed at first glance (and even seem like successes!), chasing winners as a sole strategy for long term investing is an unbalanced approach to financial planning, and here are a few things to consider:
Keep Things Simple
Investing doesn’t have to be complicated and it can also be a lot of fun! The best investments are those that align with your goals, time horizon, and perhaps most importantly, your risk tolerance. Once these factors are taken into account then you will know what funds suit both your short-term and/or long term investing needs.
It’s easy to be caught up in the fear of missing out (or FOMO) when you see your investments doing poorly, or your friends investment doing well. It’s important to do your research before investing. Understanding the historical events that cause dips as well as increases in the markets will help you avoid panic during a market downturn. This knowledge and understanding will help you make informed decision about which investments are best for your bespoke long-term success.
Remember That There Are Factors You Can’t Control
There are a great many factors that contribute to a fund’s performance and most of these factors are uncontrollable.
The one sure-fire way to make money through investing is using the “buy low and sell high” strategy. Considering this, it makes no sense whatsoever for investors in pursuit of higher returns to look solely at investments that may have already reached their peak price.
The “chasing performance” strategy appeals emotionally because inexperienced investors mistakenly see a rise in value as proof of an upward trend but this can often end up being an incredibly risky approach with disastrous consequences if not addressed.
Finally, Always Compare Oranges to Oranges
An investment fund’s composition, whether mutual or segregated, can vary greatly from the average. Some have a set goal and invest solely in equities, while others are more diversified with an investment-grade rating or lower risk factor to maintain stability for investors looking at long term growth within their portfolio.
The manner in which individual funds operate will depend on what the fund managers are trying to accomplish in the short, medium, or even long term. It should be clear that the more equity in a fund, the better. For example, comparing bond funds with US stocks may show them to only have about half as much of an expected return and risk level; however this does not mean they are worse than other types for all purposes – Just different goals!
Understanding the values and goals of each fund can help you find funds that are best suited to meeting your short, medium or long term financial needs!
There is a lot to be said for investing using biased or “counterintuitive” strategies, and that’s why it can be so important to have your investment plan customized by an expert.
If have questions about where to start, don’t hesitate to reach out anytime!