Don't Chase Performance

Main Menu

313 Blackstone Avenue
Ithaca, New York 14850
607-255-4405

#7 - Don’t chase hot performance.

Sometimes, gold and precious metals take off. Sometimes its real estate or health care or tech or telecom or bonds or emerging or international markets or the mutual fund with the best performance over the last three months or _____. Have you heard, “I need to get some of the action while it’s still hot.”

Just because gold or any other investment is performing well today doesn’t mean that it will perform well in the future.

Take the Nasdaq Composite index’s performance, for example. In February, 2000, the index closed just below 4700 points. By September 2001, the index had dropped to 1500---representing nearly a 70% loss in value. Investors who bought Nasdaq stocks at their peak got burned. Moral of the story? Pay no attention to what’s hot. Instead, select a diversified mix of stocks, bonds and cash investments that are right for you.

Be aware of the powerful force that reversion to the mean plays in the stock market---what goes up is likely to come down. In other words, it reverts back to average. Just because it is hot today, does not mean that it will be hot tomorrow, or the next 3,5, 10 years.

Mutual funds are also subject to “reversion to the mean.” Investors who jump into a “hot fund” on the suggestion of a “expert” are apt to find they joined the party as it was winding down.