Are you chasing performance?

Many investors unknowingly chase performance when making investment decisions. This type of investing is often seen as irrational as decisions are based on emotion instead of careful analysis of the value of the investment.

One of the most common examples of performance chasing is when investors use performance over the last one, three, or five years as the sole criteria for selecting investments in their retirement accounts. Historically, a period of above-market performance for a given fund will be followed by a period of below-market performance.

This is because it is virtually impossible to consistently predict the next direction of the market as a whole. Timing the purchase or sale of investments in an attempt to “beat the market” is highly unlikely to increase long-term investment performance.

Notice the first graphic below (you may want to click to enlarge). If an investor looked at this table in the year 2000, he/she might have concluded that Information Technology was a sure-fire way to make money. Unfortunately for those performance chasers following this logic, the Information Technology sector was one of the worst performing sectors for the next three years.


Of course, the same holds true for asset classes as you can see in the graphic below (click to enlarge).

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Peter J. Lazaroff