Performance Chasing and Market Timing - Ch 13 of the Bogleheads Series
November 20th, 2006 by digerati
This is Chapter 13 in the Bogleheads series here at Catch a Gideon. We are going through each chapter in the book and letting you know what we learned from reading it. You should buy the Bogleheads Guide to Investing
Performance Chasing and Market Timing Are Hazardous to Your Wealth
Past performance does not predict future performance
About 75 percent of all mutual fund investors mistakenly use short-term past performance as their primary reason for buying a specific fund. This is mostly due to advertising by the financial media.
Index funds by their nature are not often top performers when taken over a short period of time. But they are rarely (if ever) bottom performers either.
Market Timing
Market timing is an attempt to make better returns by predicting short term performance and staying one step ahead. This is rarely a good strategy. Few people (if any) are able to consistently predict the performance of any security. Even when a newsletter or manager is doing a good job for a while (maybe a year) they are unlikely to repeat that performance reliably in the future. Winners often will lose soon, and loser while certainly lose again.
Investors also get caught by some of the numbers. A typical investor would believe that a fund going up 245 percent in one year and losing 84 percent the next would produce a nice gain of 161 percent. Nothing is further from the truth. THere is actually a two year LOSS of 61 percent. If you invest 10,000, after the first year you have $24,500. After the second year you would have $3,920.
Financial Magazines
Financial magazines are not the investors friend. Many contain useful general advice (similar to this site). But many focus their articles and covers on specific tips (10 stocks you must own today!). Those tips are rarely worth the paper they are printed on. They don’t help the investors, but they certainly sell magazines.
It’s safe to say that no one can predict the market. This is why we diversify, so that whatever happens we are covered.
Stay the Course
Since purchases, sales and exchanges can now be made with the push of a button, it’s hard for many investors to resist the urge to trade more frequently than they should. Of course, when doing so, they’re typically buying high and selling low. When emotions run high, logic flies out the window and performance usually follows.
That’s it for this chapter. Go and buy The Bogleheads Guide to Investing.
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