Chasing performance

This is by far the biggest mistake investors make. According to research, there is over an 80% correlation that last year’s best performing investments will be the most popular investments. If chasing performance is your key strategy to selecting investments consider these facts:

• Everything goes in cycles (interest rates, stock markets, sectors, mutual funds, economies, businesses, etc). What goes up can come down. Just because it was the best, does not mean it will stay the best.
• If it were that easy, we would all do it and chasing performance would always work. Well, we all do it but unfortunately, it rarely works.
• Short-term performance is a random walk. It cannot be predicted.

Chasing performance does not work. According to our research, you have less than a 10% chance that this years top performing investments will be next years top performing investments. In other words, you have a 90% chance of being wrong.

Market timing

Knowing which sector, market or investment will be the best is impossible. It is just like predicting the future is impossible. Investing is a science. It requires structure, discipline, and process. It is not about Ouiji boards, the position of the stars, feelings, intuition or guessing what will be the next best thing (for a while).

Single dimensional analysis

What are you looking for in a mutual fund? Chances are it has something to do with performance. Performance drives investments decisions and why not? We invest money to make money so performance becomes the key determinant of selecting mutual funds. Consider that performance is only one dimension of a mutual fund. While it is one of the most important determinants, it is not the only determinant. Choosing a mutual fund based on performance and performance alone is what we call single dimensional analysis – you are looking at only one aspect or dimension. In other terms, it is no different than buying a car based on colour and colour alone. Would you buy a car just because it is red? You would not take into consideration, the brand, age of the car, condition of the car, options, etc.

Far too often, investors look at performance (1, 3, 5 and 10 year returns) without looking at very important characteristics like investment discipline, management fees, taxation, holdings, and risk just to name a few. Proper investment analysis requires good research. Good research comes from multi-dimensional analysis.