Let’s talk about a favorite and costly pastime of investing: chasing returns. It means that we invest in assets that have recently done well or we get out of investments that have recently done poorly. This happens in good times as investors seek better returns, and they happen in bad times when assets like cash are more attractive than money-losing stocks.
Chasing returns can feel very good at the time but comes with a real financial cost. Dalbar, Inc. estimates that equity investors underperformed the S&P 500 by roughly 6% per year over the last 20 years1 due to the timing of buying and selling or chasing returns.
So Why Do We Do It?
There are two primary reasons it feels right to buy after we witness gains and sell after experiencing losses:
- We are greatly influenced by what just happened. Whenever we try to project the future, our brains are significantly influenced by what just happened. Good outcomes today implies that things will be good going forward, and vice versa. Is there a correlation?
- This is exacerbated by the narrative of the day. Our brains love a good story. We seek information to understand. When the market goes up, the narrative is often positive, leading us to feel good about the future. When the market goes down, the narrative is almost always negative, reinforcing a negative outlook.
Normal, But Not Beneficial
It is completely normal to invest in things we expect to go up and avoid assets we expect will go down. In fact, any rational person would do that as part of their investment strategy. But the problem is that markets move quickly and often surprisingly. Narratives are wonderful and can be quite accurate in hindsight. They can even increase our confidence in a certain viewpoint, but narratives offer no predictive ability in future outcomes.
This is why we advise you to remain disciplined to your plan and stay the course. I recognize this is not easy; temptations abound that are pleasing to our mind and feelings. But that is why you have us. Together, we can be aware of common investment pitfalls and ensure thttps://calendly.com/wregenscheid/30minhat all investment decisions are well-thought and in line with your stated objectives. If you're feeling the need to chase returns, set us some time with us. https://calendly.com/jgilles-3/30min
- JP Morgan Guide to the Markets. July 2022 edition. Slide 63.