Home
>
Stocks & Mutual Fund
>
Mutual Fund Honor Roll ? Buy High, Sell Low by Chasing Performance

Mutual Fund Honor Roll ? Buy High, Sell Low by Chasing Performance

Buy high and sell low -- It's not a typo.

Millions of investors guarantee their failure by selecting mutual funds and stocks based on quarterly or annual performance records. Do you chase performance? You might be buying high and selling low!

As the year draws to a close, millions of mutual fund investors begin an annual event to divine next year's winners. Yet most of these individuals rely heavily on a time-honored ? but terribly wrong ? method of evaluating strength. Whether analyzing screening tools from websites, reviewing fund honor rolls in magazines, or using star ratings from fund analysts, normally savvy business people foolishly chase the returns of last year's hottest investments.

This begs the question: Can top performing mutual funds lead two years in a row? Consider a study commissioned by Vanguard Investments Australia and released by Morningstar. The five best performing funds were analyzed from 1994 to 2003. Here are the results:

-- Only 16% of top five funds make it to the following year's list.

-- Top five funds average 15% lower returns the following year.

-- Top five funds barely beat (by 0.3%) the market the following year.

-- 21% of all top five funds ceased to exist within the following 10 years.

Academic studies and market statistics confirm the typical investor acts in direct opposition to the sage advice ? buy low, sell high. It's only after high returns are realized and reported that investors pour money into both stock and bond mutual funds. In fact, Financial Research Corporation compared investor cash flows into mutual funds. Purchases immediately following best-performing quarters exceed 14 times those immediately following their worst-performing quarters. In other words, you are 14 times more likely to buy funds at their highest price than at it's lowest. Buy high and sell low.

Just what kind of damage are they inflicting to their investment returns? DALBAR, Inc., conducted a well-known study called Quantitative Analysis of Investor Behavior. The study confirms investors' poor timing and the resulting financial carnage. Investors buy funds immediately after a rapid price appreciation. This just happens to be right before investment performance wanes. Prices fall soon after and the investors quickly dump their holdings to search for the next hot fund. The resulting returns fail to even beat inflation! When measured over the last nineteen years, the average equity investor earned a meager 2.6% annual return. Compare that to a 3.1% inflation rate and a 12.2% return from the S&P 500 over the exact same time period. Not only did investors fail to keep up with the market, they also lost money to inflation.

We've all seen the warnings on packages of cigarettes. Even smokers understand their relevance; smoking is not a healthy activity. So why do investors not heed warnings about mutual fund returns? You've all seen those statements too. But can you remember what is said? Past performance is not a guarantee or indicator of future results. Research and studies have proven this fact, yet the majority of investors choose to ignore this warning. Yes, it's an easy means of comparing funds. It also happens to be completely irrelevant. Let me evangelize these words for you. Past performance does not predict future results!

Here's how you can stop chasing short term performance and stay focused on your financial goals. Identify appropriate long-term investments by evaluating the following:
(1) Leadership: How does the fund perform relative to similar size and similar style funds?
(2) Tenure: How long have the managers and advisors been at the fund?
(3) Management: Managers well-known, highly-regarded (e.g. remember Peter Lynch)?
(4) Consistency: Are the 3, 5, and 10 year returns all above average?

Finally, measure returns based on your entire portfolio. History shows that no single investment success repeats. Accept the fact every year is different and brings new leaders and laggards. Use an asset allocation strategy to guarantee balance and increase long term returns among all your investments. Invest in a diversified portfolio to meet your financial goals - and stick with it.

Not yet learned your lesson? Consider this: Fourteen mutual funds topped the 2003 charts with returns over 100%. In 2004, these fourteen funds lost over 4% while the S&P 500 gained 3%. Congratulations, chasing performance lost 7% of your money this year.

Tim Olson

theassetadvisor.com
Subscribe to our free newsletter

Mr. Olson is the editor of The Asset Advisor, a financial investment service providing proven strategies for no-load mutual fund investors. He brings 26 years of education and experience from Stanford University, Ernst & Young financial consulting, personal wealth management, and venture capital investing.

Indian Head Park taxi to Midway .. Lockport Chicago limo O’Hare

In The News:

The Reachy 2 robot is designed to be friendly and approachable, inviting natural interaction and is perfect for research, education and experimenting with embodied AI.

Kurt "CyberGuy" Knutsson shares several easy ways to keep your credit cards safe from digital thieves while you're traveling this summer.

Arcturus sets up cameras around the edges of baseball stadiums to capture real-time action and generate a 3D digital clone of the game.

Stay up to date on the latest AI technology advancements and learn about the challenges and opportunities AI presents now and for the future.

The CyberGuy explains why healthcare organizations are vulnerable to hackers after there have been a half dozen data breaches this year.

Developed at two California universities, the innovative technology combines brain-computer interfaces with advanced AI to decode neural activity into audible speech.

Microsoft patches 12 critical flaws, but six have already been exploited by criminals. Kurt “CyberGuy" Knutsson says updating your system is only a short-term fix.

Tech expert Kurt “CyberGuy" Knutsson discusses how robots can milk, feed and clean cows on dairy farms, boosting efficiency and comfort.

Tech expert Kurt “CyberGuy" Knutsson says quantum internet ensures unhackable security and redefines online privacy and speed.

Kawasaki's CORLEO is a hydrogen-powered, AI-driven rideable robot. Tech expert Kurt “CyberGuy" Knutsson reports on this new way of thinking about off-road transportation.

The CyberGuy breaks down five mobile privacy terms that could make a difference when it comes to keeping your personal information safe.

A groundbreaking robot that's like a real-life Wall-E uses advanced artificial intelligence to replicate natural gestures and deliberate actions with striking accuracy.

If not properly managed, Windows Defender Application Control, a security feature with Windows, could be a potential security vulnerability.

Stay up to date on the latest AI technology advancements and learn about the challenges and opportunities AI presents now and for the future.

FlashBot Arm, a semi-humanoid robot, acts more like a human than traditional robots, and you may see it working at a restaurant, healthcare center or hotel.

There are multiple ways to find your missing Android phone after it goes missing. One method involves using a smartwatch to ping your phone.

The NeuroOne OneRF Ablation System is a new device with FDA-cleared technology designed for both diagnosing and treating neurological disorders in one procedure.

The CyberGuy provides tips to protect yourself from criminals who use various methods to make unauthorized transactions using your account information.

New drone technology maps land and water with stunning accuracy, giving researchers and conservationists a new way to understand our planet.

Stay up to date on the latest AI technology advancements and learn about the challenges and opportunities AI presents now and for the future.

X hit with massive data breach with 200 million records leaked, including emails. Tech expert Kurt “CyberGuy" Knutsson offers seven tips to help protect yourself.

Atlas robot by Boston Dynamics amazes tech expert Kurt “CyberGuy" Knutsson with its breakdancing moves.

Tech expert Kurt “CyberGuy" Knutsson talks about how Google kept Android SafetyCore details quiet until it scanned users' photos.

Hydrogen trucks debut in Georgia, sparking debates on costs and green freight gains. Kurt “CyberGuy" Knutsson comments on this promising chapter in green logistics evolution.

Tech expert Kurt “CyberGuy" Knutsson says ChatGPT learns from chats, but you should avoid sharing sensitive information to protect your privacy.

Mutual Fund Honor Roll ? Buy High, Sell Low by Chasing Performance

Stocks & Mutual Fund