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Chasing Performance Is a Fool's Game

Written by: Nat Worden 06/29/12 - 7:00 AM EDT
Tickers in this article: AAPL JPM

Davis found that 96% the top quartile had spent at least one three-year period during the decade in the bottom-half of performance rankings, 79% had spent at least three years in the bottom quartile and 47% had spent at least three years in the bottom 10%.

  • Several recent studies showed that professional asset allocators -- foundations, endowments and pension plans that have their choice of the top investment managers available -- do a terrible job of moving funds from one manager to another. When a manager suffers a losing streak, institutions pull their funds and reinvest them with someone who recently had a winning streak.

    • Unfortunately for these institutions, the loser who just lost their business typically then becomes the winner, while the recipient of the reallocated funds suddenly gets clobbered.

  • The average investor fares even worse in chasing performance. Mutual fund investors over the last two decades saw total returns that were only two-thirds the amount enjoyed by the S&P 500, according to a 2010 study conducted by Dalbar, a financial services market research firm.

    • This dismal performance largely stemmed from the fact that most investors sell their holdings when the market falls and they get scared, and then they buy back into the market when it's roaring and stocks are expensive. As I've written before numerous times in this space, this is exactly the opposite of what investors should be doing, but it's human nature.

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    As you can see, chasing performance as an investor is a failed strategy. That's why it's important for investors to make well-informed, intelligent decisions in the first place on how they invest their money, whether they're choosing a professional to do it for them or they're trying to do it themselves.

    If that initial decision is made poorly, then a change is probably wise. If, however, the initial decision was a good one, then it's absolutely crucial that investors refrain from being spooked by a slump.

    Investing in the stock market is a marathon, not a sprint. Those who take a short-sighted approach to stocks are bound to lose.

    It doesn't help that many quarters of the financial media will tell people otherwise, blaring headlines that tout get-rich-quick schemes. Wall Street, for its part, isn't always a beacon of truthfulness either. The media is trying to get your attention to boost its advertising reach, and Wall Street is trying to sell you its products.