What are the dangers for investors of ‘Chasing Performance’?

In the current era of low deposit interest rates, many low and medium risk investors are increasingly dissatisfied with the returns they are receiving on the cash and bonds portion of their investment portfolio.

Some investors may be tempted by a ‘hot tip’ or an investment that has recently out performed, but if they acted on this, they risked ‘chasing performance’ – buying high and selling low. The latest ‘hot tip’ may seem tempting, but unless the ‘opportunity’ was thoroughly researched, they seldom produce the returns hoped for. Investors should be aware of the tip’s source and be sure it does not involve inside information which may be designed to talk up the value of a security by a vested interest. Always remember, due to the cyclical nature of the market, today’s star performer may be tomorrow’s loser and vice versa.

When ‘hot tips’ post stellar returns, the problem is that those stellar returns have already been achieved and past performance is in the past. Buying into a security when it registers top quartile returns will often guarantee that you are buying high. This mistake is frequently compounded by a temptation to sell one of your lower-performing investments in the portfolio to make cash available for the new favourite. You are now buying high and selling low, breaking a basic rule of successful investing.

There is the danger of short-termism. If you have an investment strategy and regularly change it, based on a short-term hunch or in response to a market move, it can upset asset allocation, potentially decreasing the chances of long-term investment success.

Financial Advisers know that there is always an impulse to chase performance, this is part of human nature, but keeping to a strategy may deliver higher returns over the long term. Instead of chasing investment performance, investors should focus on their long-term investment strategy. Using a well-diversified portfolio, designed to meet your investment goals at a level of risk that you are comfortable with, is more likely to deliver long-term returns than chasing yesterday’s winners.

Comments are closed.