Don’t Let Past Investing Successes Cloud Your Judgment

We see some variation of this disclaimer, ‘Past performance is not necessarily indicative of future results.’ in just about every investment related advertisement, but we all too often ignore it. Regulatory bodies require investment firms and mutual fund companies to use that language for a reason – because it’s true. While useful in some situations, the over-reliance on the past to assess the future is a dangerous strategy that can lead to buying high and selling low.

The problem, of course, is that yesterday doesn’t always tell you what tomorrow will bring. In other words, looking at your statement to see what funds performed best last quarter or last year and moving assets out of your current holdings to those that performed the best, may result in your account being late to the party. In most cases, you would need to have been invested in the ‘hot’ funds prior to their strong performance in order to benefit.

I’ve seen investors making this mistake time after time over the years. It is our natural tendency to want a piece of what is making someone else so much money. Maintaining a disciplined strategy to gain exposure to many asset classes over the long term will take the guesswork out of deciding on your appropriate allocation and chasing the hot funds.

Chasing returns is without a doubt the most common mistake I’ve seen do-it-yourself investors make throughout my career. Purchasing funds that are already at or near their top and selling them when they are poised for a recovery will devastate long-term performance.

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