Chasing historical returns: a tempting but flawed strategy
By James Paterson, Head of Advice
05 October, 2017
“I see your XYZ Growth fund has been the best performing fund over the past year so I want to invest all my funds in this please. Then when that slows I will move over to another fund”. Sound familiar?
I couldn’t tell you how many times I have heard this over the years but it would be a lot. I can even put my own hand up and say I have done this as well It’s only natural isn’t it?
It’s human nature to look at an investment that’s been running hot and think that the out performance can continue into the future. Buying an investment that had an outstanding year and selling an investment that underperformed the market sounds like a smart move. Unfortunately, doing the complete opposite of what I just described is actually the better move. We’ve all heard the saying “Buy low and sell high,” but why do most of us buy high and sell low?
The truth is that the market, especially over the short term, can be random and unpredictable. Research* has shown that the average investor is missing out on 3.5% every year because they have a tendency to react to the latest moves of the market, rather than holding tight. A great example of this was last year around the US Presidential elections. As soon as Donald Trump was elected President, we witnessed a small number of investors jumping out of growth funds and into more conservative options driven by fear markets were going to crash. As we know, the crash never eventuated. In fact share markets did the opposite and performed strongly so those investors who panicked or thought they could predict the market missed out on this run.
At Fisher Funds we are passionate on getting our investors into the right strategy. Understanding your goals the timeframe you have to meet them and your appetite for risk us provides us with an appropriate starting point to create your investment strategy. This normally means an investment portfolio made up of a range of funds covering the main asset classes, providing a mix between growth and conservative investments and sensible diversification. Not only that, we will do our best to make sure you stay committed to your chosen strategy, regardless of any volatility or uncertainty that we know will exist from time to time.
So next time you find yourself wanting to buy yesterday’s winners or trying to predict the markets next move, stop and remember that while chasing returns can feel good in the short term, more often than not it is a strategy that will not pay off over the long term. So stay true to your strategy and we’re here if you need us.
*DALBAR Annual Quantitative Analysis of Investor Behaviour Report 2015