A good title grabs our attention. A great title combats our reduced attention spans and propensity for multi-tasking to capture our attention completely and draw us into the piece itself. Such was the case with a recent headline for a recent Vanguard podcast: “Chasing fund performance may be hazardous to your wealth.”
Seemingly, investors can’t stop from chasing last year’s winners, in spite of mountains of evidence suggesting that’s not the way to build wealth. Vanguard’s recent study details just how much in potential returns investors are leaving on the table when they chase hot-performing equity mutual funds, instead of investing with a buy-and-hold approach. Vanguard found that a simple buy-and-hold approach outperformed a performance-chasing strategy by 2.8 percent per year on average during the ten-year period that they evaluated.
Another report by S&P Dow Jones Indices reviewed the performance of 687 actively managed domestic U.S. equity mutual funds. Out of the 687 funds that were in the top quartile as of March 2012, only 3.78% managed to stay there by the end of March 2014. The conclusion: past performance was not an indicator of future outcomes 96.22% of the time. Further, just 1.90% of the large-cap funds, 3.16% of the mid-cap funds and 4.11% of the small-cap funds remained in the top quartile.
Please repeat after me, past performance does not guarantee future results. It’s this simple: performance-chasing inappropriately focuses attention on the short-term. Further, it encourages the view that investment returns are the lone goal of investing. Instead, we advocate building a properly diversified portfolio based on your risk tolerance, time horizon and goals that you can hold for the long-term. Market history and countless studies prove that this is the surest approach to build wealth and meet all of your goals.
(Note: For more information on this topic refer to our article from earlier this month.)