Financial Tip Friday: Don’t Chase Investment Returns

Financial Tip Friday: Don’t Chase Investment Returns

So if you have been following the stock market, really for the past 9 months, you will have noticed a lot volatility. In fact, the stock market hasn’t achieved a new high mark since May of 2015, we have had to two corrections of 10%, and are potentially in a bear market. For the savvy investor this isn’t a time for fear, but really a time to look at this on the positive side of things. If you are continuing to invest in your 401k or IRA or in a brokerage account then you realize that stocks are on sale. You buy more shares now and they become worth more in the future.

Despite that fact a lot of people are scared. And they make a classic mistake of selling low and buying high or they decide to change their investments because what they have invested in is suddenly lose money. Instead, people look for an investment whether that be stocks, bonds, precious metals, or whatever that has done well or isn’t doing as bad in say the previous year. In other words, they use only last year’s information to make investments for the future. If that is you then STOP IT NOW! Don’t chase investment returns, particularly based upon what happened last year.

How to Choose Your Investments?

Basing your financial future on what happened only last year is a huge no-no and extremely scary. I like to think of it this way. If you are a fan of any kind of professional sport you have probably witnessed the athlete that had a monster year. I mean they have a career year. They were a leader in runs, baskets, points, whatever. There will, inevitably, be some team that will pay that athlete a HUGE contract based upon that one year of production. There are all kinds of stories about athletes who sign huge contracts and then don’t perform up to the previous years’ achievements.

When this happens fans often scream bloody murder. They get mad at the athlete, the professional team, and the pundits for not saying anything sooner. Or they will go into “I told you so” mode. I think most people would rather have a consistent player year in and year out than someone who may or may not have a star performance.

The same is true for your investments. You DO NOT invest based upon a single year of a performance. Rather, when I buy a mutual fund or think about changing investments I look for investments that have LONG track records of at least TEN years or more. If they don’t have a ten year track record then I don’t even bother. And if you read the prospectus of that investment you will notice that they will have some monster years and then they will have some down years, but the point is to determine their consistency. For example, if you are looking at an investment that has gained 40% over one year, but only has gained 6% over 10 years vs. an investment that has average 8% over the last ten years and isn’t quite as flashy I will take that 8% consistency all day long.

I mean the story is always the same. The tortoise ALWAYS beats the hare. It isn’t flashy but it gets the job done.

That is why I think so many people love INDEX FUNDS, Index funds, as the name implies, tracks a specific index. They might track the S&P 500, the Russell 2000, the Dow, the Nasdaq, etc (all of these different indexes track different types of investments–e.g. small-cap stocks, large-cap, technology, etc). For the most part, my portfolio is full of index funds. Of the 7 mutual funds that I own 3 of them are index funds. And I am planning, eventually, to switch everything to three basic index funds. I like the simplicity of that kind of portfolio. The only reason I don’t do it is because I don’t necessarily have those funds as choices in my current retirement plans so I have to cobble together investments that best resemble those funds.

The Bottom Line: Ultimately, the bottom line is this: Don’t be fooled by last year’s performance. Don’t chase investment returns. Just because a fund had a great year the previous year doesn’t mean they will do great again or if they had a bad year. Look for investments, particularly, mutual funds with long track records of at least 10 years. You can easily find those track records by looking up the record of that particular mutual fund online. It really is that simple. You might invest in things that don’t explode onto the market every year, but I would much rather have consistency than an investment that is great one year, gets all of my money and under performs like many of today’s modern athletes.

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