Stop chasing achievements! | White coat investor

One of the most important lessons a successful investor must learn is to stop chasing performance. When chasing performance, you invest your money in what has performed best recently. It’s a superficial way to select an asset allocation (mix of investment types) and an even more superficial way to choose individual investments to meet your asset allocation. There is a reason that every investment prospectus will contain something like:

“Past performance is no guarantee of future results.”

I know inexperienced investors understand this statement. The problem is they don’t believe it. Or perhaps more importantly, they don’t actually know how to properly select an investment or asset allocation, so they default to the only thing that makes sense based on the information available to them: choosing the one that has the best performance metrics associated with it.

Why you shouldn’t pursue performance

Let me give you a few examples of what chasing performance looks like. This comes from an internet forum:

Sell ​​all bonds or not

I am 73 years old and have been retired for 16 years. I have about $600,000 (30%) in the Vanguard Total Bond Index Fund. Since bonds haven’t done well in recent years, I’m not sure if I should sell all the bonds and put them into some index mutual funds. I’m basically a buy-and-hold investor. I move some money, but not someone trying to judge the stock market. I know the founder of Vanguard said buy and hold, don’t try to beat the market. It has worked well for me in the more than twenty years that I have worked at Vanguard. I wonder what other investors have done with their bonds; they kept track [the] normal basic idea of ​​having stocks and bonds?

Here’s an investor – and there are many – who just realized that interest rates have risen rapidly in 2022, leading to poor bond performance that year. Despite the fact that their bond yields and associated expected future returns are now higher, this investor is now considering taking their money elsewhere. Classic buy high, sell low behavior. When steak is on sale, you buy more, not less. But when bonds are on sale, you don’t buy more, you actually sell what you have? How does that make any sense?

Here’s another example from my email box:

TSP S fund versus C fund

I’m trying to understand the growth potential of the S Fund, which I understand is a complete US stock fund with everything but the S&P 500. My hypothesis is that while there is volatility in the S Fund, there is huge growth potential over time as it contains what will hopefully one day become large market cap companies and future large US companies. Charts from the TSP show that the return for the S Fund is much lower than for the C Fund. The TSP website shows that in some years the S fund performs better than the C fund and vice versa.

1. Has the S fund really outperformed the C fund over time? I’m not sure if this is true.
2. Does it make sense to invest heavily in the S fund now, hoping that there is potential for more growth in the S fund than in the C fund?
3. How would you divide your investments between the C fund and the S fund?
4. Does it make sense to hold a larger percentage of S fund shares than C fund shares and think about the potential for supposedly greater growth over the next twenty to thirty years?

This investor has a deeper understanding than the previous example, but still struggles to resist the siren song of chasing performance. Part of the problem is that the investor uses the wrong time, a common problem. Instead of saying:

“Charts from the TSP show that the return of the S Fund is much lower than that of the C Fund. The TSP website shows that in some years the S Fund outperforms the C Fund and vice versa…”

You should say

“Charts from the TSP show that the return of the S fund was much lower than that of the C fund [over such and such time period]. The TSP website shows that in some years the S fund outperformed the C fund and vice versa.”

Doing this will help you remember the truth about past performance; that’s the past.

More information here:

Investing: what rich people do

The nuts and bolts of investing

150 portfolios better than yours

The winners always change

It is also important to understand the concepts of expected returns and returns, as well as the average and cyclical nature of relative investment returns. Spending a few minutes on a graph like this can often do wonders:

The lack of year-to-year persistence in relative investment returns is strikingly and memorably highlighted. Imagine how disappointed you would be in 2008 if you had put all your money into emerging market stocks and real estate because they had delivered the best returns over the past three or four years? Or what if you put all your money into cash at the beginning of 2019 because the stock had performed so poorly the month before? The pendulum is swinging, but if you chase it, you will always miss out on the best artists.

When looking at past performance, try to reach a deeper level of understanding. Try to understand WHY one investment has outperformed another in the past. Ask yourself whether the reason for this outperformance is likely to persist, disappear or even reverse. Recognize your limited ability to accurately predict the future.

Perhaps most importantly, write down a static asset allocation that you can maintain over the long term, implement it, and return to it every year or so. (By the way, if you’re a new reader, I make the effort to insert links into my posts like the one in the previous sentence for a reason. Please use them.)

Eliminate your need to constantly watch investment news. Eliminate your need to predict the future to be successful. Change your approach from a gambling-oriented approach to an investing-oriented approach. Boring investments are good investments. This stuff isn’t that hard. You can do it!

What do you think? Why is it so difficult for investors to avoid chasing returns? Have you successfully stopped yourself from chasing achievement?