Chasing Carriages and Investment Returns

The Wall Street bullies will market fear whenever possible. They know that investors will follow the hot sector and the use of fear will encourage investors to move to the safe or hot asset class. To succeed in investing you should own equities, globally diversify and rebalance. Most importantly remain disciplined.

Investment Conference
Investment Conference (Photo credit: Salmaan Taseer)

This will require that you fire your broker and hire an investor coach.

For investors, too many people run after the carriage after the carriage has long left. They do that by chasing returns. They buy investments after they have had extensive appreciation in value. Ask anyone who bought Internet investments in 2000 or real estate investments in 2006.Unfortunately, retirement plan administrators do the same as well when adding and subtracting investment options to a participant directed plan. The Center for Retirement Research (CRR) at Boston College just did a study on plan investment lineup changes and discovered that when making changes to a 401(k) plan’s investment lineup, administrators chase returns and do not end up improving investment performance. The study looked at investment options that were added and dropped 3 years before and after the actual change was made.

Newly added funds outperformed randomly selected funds before the change was made. However, this outperformance disappeared after the fund changes were made as the added funds did worse while the dropped funds did better.

Investors have a tendency to sell the poor performing funds and buy the hot funds. This results in their portfolio being invested in one hot asset class. When the ‘bubble’ bursts their portfolio sinks. To succeed you need a globally diversified portfolio and discipline.

Please comment or call to discuss how this affects you and your investment goals.

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