Stop Chasing Performance or You Will Lose Your Investment in Market Leaders, Says Author

 Stop Chasing Performance or You Will Lose Your Investment in Market Leaders, Says Author

It is accurate. By basing their stock and mutual fund selections on quarterly or yearly performance records, millions of investors ensure their own failure. Are you motivated by results? As a result, you may be making a loss when you sell.
As we near the end of the year, millions of people who invest in mutual funds start an annual tradition to determine who will be the winners in the new year. However, the majority of these people still put a lot of stock in an old-fashioned (and disastrously incorrect) way of measuring power. Normally astute businesspeople naively seek the profits of last year's most popular investments, whether it is through examining online screening tools, reading fund honor rolls in periodicals, or utilizing star evaluations from fund experts.

Now we have to ask: can the best mutual funds maintain their dominance for two consecutive years? Take a look at a report that Morningstar put out after being commissioned by Vanguard Investments Australia. From 1994 to 2003, the top five funds' performance was examined. The outcomes are as follows:Among the top five funds, just 16% return for the subsequent year.The top five funds saw returns that are 15% lower compared to the previous year.Compared to the market the following year, the top five funds just outperformed it by 0.3%.In the decade that followed, 21% of the top five funds went out of business.



Both academic research and market data show that the average investor goes against the golden rule: buy low, sell high. Investors pump capital into bond and stock mutual funds only when substantial returns are recorded. Financial Research Corporation actually compared the inflow and outflow of funds from mutual funds. There is a fourteenfold increase in purchases made straight after a company's best-performing quarter compared to its worst-performing quarter. Buying funds at their peak is fourteen times more likely than buying them at their low. Put your money into the stock market and hope for the best.

How exactly are they hurting the returns on their investments? Quantitative Analysis of Investor Behavior was a famous study done by DALBAR, Inc. Investors' bad timing and the subsequent financial disaster are confirmed by the study. Quick price appreciation prompts investors to purchase funds. It so happens that this occurs shortly before investment performance starts to decline. Investors immediately begin selling their interests as prices plummet, leaving them scrambling to find the next hot fund. You will not even be able to beat inflation with the returns you get! The typical equity investor made a pitiful 2.6% yearly return over the past nineteen years. Think about it: throughout the same time span, inflation was 3.1% and the S&P 500 returned 12.2%. In addition to falling behind the market, investors saw their money eaten away by inflation.

The warnings on cigarette packs are nothing new. Everyone knows they are important; smoking is bad for you. So, why do people put their faith in mutual fund performance despite repeated warnings? Those claims are also familiar to you. Is the content of the conversation something you can recall? Previous results should not be relied upon as a predictor or assurance of future outcomes. Despite the fact that this has been confirmed through research and surveys, most investors still opt to disregard this warning. Yes, it is a simple way to compare funds. Furthermore, it is wholly unimportant. Allow me to extol these words in your behalf. Results in the past are no guarantee of future outcomes!

Here's a way to maintain focus on your long-term financial objectives rather than chasing after short-term gains. Evaluate the following to find suitable investments for the long term:Group management:How does the fund's performance stack up against others of a comparable size and style?Duration of management:For how many years have the fund's advisers and management worked there?Competence in management:Do you know any famous and esteemed managers (like Peter Lynch)?Regularity of profits:Are all three time periods' returns above average?



Lastly, take your entire portfolio into account when calculating returns. No investment has ever been a guaranteed winner. Recognize that new leaders and laggards appear each year. To ensure a steady stream of income and maximize your investment returns over the long run, implement an asset allocation plan. Achieve your financial objectives by consistently investing in a diversified portfolio.

Still have not gotten the hang of it? Think about this: With gains exceeding 100% in 2003, fourteen mutual funds dominated the rankings. Fourteen of these funds saw losses of more than 4% in 2004 when the S&P 500 rose more than 9%. Your investment in chasing performance was a complete bust this year, losing 13% of its value.

Wow, that is cool!

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