Investment Management:
The Emotions of Investing - Part 1 - "The Return Chaser"
by: Roy Bodinus for the Debt Consolidation Loan
Directory
Chasing the hot mutual fund or segment of the market rarely works. Let’s
consider a typical scenario that investors go through when reviewing their 401k
statement.
Dave is a hard-working father of two who lives well within his means. He
recognizes the value of saving pretax and aims to take advantage of compound
growth by deferring as much as possible from his salary into his company’s 401k
plan.
Each January, Dave looks at his statement to see how his account has performed.
Unfortunately, his account is only up 7% for the year while the S&P500 notched a
gain of 12%. Not feeling too good about his return, Dave proceeded to look at
all the funds offered through is 401k plan. He identified the funds that
performed well over the past year that he didn’t already own and transferred
assets into those funds that had produced the best returns. Sounds reasonable,
right?
Twelve months later, Dave takes the time to review his 401k statement in detail
again. His account is up 6% for the year while the S&P500 gained 10% for the
same time period. The same result as last year. In fact, Dave diligently has
been reviewing performance of the funds in his account each January for the last
five years and moving money to those that are the highest performers. Why then
does the performance of his account consistently lag the performance of the
stock market in general? Dave is not alone. He has fallen into the same trap as
countless other investors: chasing investment returns.
What may seem like a logical strategy is actually one of the most dangerous
approaches to investing. In order to move money around between mutual funds and
various segments of the market and to be successful in doing so, Dave would need
to be either really lucky or be able to predict future performance before it
happens, not after the fact. Investment hindsight is always 20/20.
Don’t get caught chasing returns. It is a game you can’t win over the long-term.
Identifying your tolerance for risk, then employing a strategy that offers the
optimal blend of funds that will maximize your return potential for whatever
level of risk you are comfortable with, is the approach that makes an investor
successful.
Investment Management:
The Emotions of Investing
- The Return Chaser - (Current Article)
- The Fearful Investor
- The Effects of Greed
Copyright © 2007 Northwest Advisory Group, Inc.
The views in this article do not necessarily reflect those of the Debt
Consolidation Loan Directory.
This article is for educational purposes only and is not a personal recomendation of any strategy or product. You should not make any changes to your financial situation based only on this article. It is advised that you consult a qualified advisor and tax professional to evaluate your situation before making any changes to your finances.