adding onto a ranch style home skokie legacy home remodeling add a master suite to house patterson remodeling adding a addition to my home .. Chicago Drug testing

Mutual Fund Honor Roll ? Buy High, Sell Low by Chasing Performance

Buy high and sell low -- It's not a typo.

Millions of investors guarantee their failure by selecting mutual funds and stocks based on quarterly or annual performance records. Do you chase performance? You might be buying high and selling low!

As the year draws to a close, millions of mutual fund investors begin an annual event to divine next year's winners. Yet most of these individuals rely heavily on a time-honored ? but terribly wrong ? method of evaluating strength. Whether analyzing screening tools from websites, reviewing fund honor rolls in magazines, or using star ratings from fund analysts, normally savvy business people foolishly chase the returns of last year's hottest investments.

This begs the question: Can top performing mutual funds lead two years in a row? Consider a study commissioned by Vanguard Investments Australia and released by Morningstar. The five best performing funds were analyzed from 1994 to 2003. Here are the results:

-- Only 16% of top five funds make it to the following year's list.

-- Top five funds average 15% lower returns the following year.

-- Top five funds barely beat (by 0.3%) the market the following year.

-- 21% of all top five funds ceased to exist within the following 10 years.

Academic studies and market statistics confirm the typical investor acts in direct opposition to the sage advice ? buy low, sell high. It's only after high returns are realized and reported that investors pour money into both stock and bond mutual funds. In fact, Financial Research Corporation compared investor cash flows into mutual funds. Purchases immediately following best-performing quarters exceed 14 times those immediately following their worst-performing quarters. In other words, you are 14 times more likely to buy funds at their highest price than at it's lowest. Buy high and sell low.

Just what kind of damage are they inflicting to their investment returns? DALBAR, Inc., conducted a well-known study called Quantitative Analysis of Investor Behavior. The study confirms investors' poor timing and the resulting financial carnage. Investors buy funds immediately after a rapid price appreciation. This just happens to be right before investment performance wanes. Prices fall soon after and the investors quickly dump their holdings to search for the next hot fund. The resulting returns fail to even beat inflation! When measured over the last nineteen years, the average equity investor earned a meager 2.6% annual return. Compare that to a 3.1% inflation rate and a 12.2% return from the S&P 500 over the exact same time period. Not only did investors fail to keep up with the market, they also lost money to inflation.

We've all seen the warnings on packages of cigarettes. Even smokers understand their relevance; smoking is not a healthy activity. So why do investors not heed warnings about mutual fund returns? You've all seen those statements too. But can you remember what is said? Past performance is not a guarantee or indicator of future results. Research and studies have proven this fact, yet the majority of investors choose to ignore this warning. Yes, it's an easy means of comparing funds. It also happens to be completely irrelevant. Let me evangelize these words for you. Past performance does not predict future results!

Here's how you can stop chasing short term performance and stay focused on your financial goals. Identify appropriate long-term investments by evaluating the following:
(1) Leadership: How does the fund perform relative to similar size and similar style funds?
(2) Tenure: How long have the managers and advisors been at the fund?
(3) Management: Managers well-known, highly-regarded (e.g. remember Peter Lynch)?
(4) Consistency: Are the 3, 5, and 10 year returns all above average?

Finally, measure returns based on your entire portfolio. History shows that no single investment success repeats. Accept the fact every year is different and brings new leaders and laggards. Use an asset allocation strategy to guarantee balance and increase long term returns among all your investments. Invest in a diversified portfolio to meet your financial goals - and stick with it.

Not yet learned your lesson? Consider this: Fourteen mutual funds topped the 2003 charts with returns over 100%. In 2004, these fourteen funds lost over 4% while the S&P 500 gained 3%. Congratulations, chasing performance lost 7% of your money this year.

Tim Olson

TheAssetAdvisor.com
Subscribe to our free newsletter

Mr. Olson is the editor of The Asset Advisor, a financial investment service providing proven strategies for no-load mutual fund investors. He brings 26 years of education and experience from Stanford University, Ernst & Young financial consulting, personal wealth management, and venture capital investing.

In The News:

Managing Investing and Stock Market Risks

Reduce your investing and stock market risks by:Setting your sights... Read More

Bargain Basement - Finding Stocks That Go Up

Have you been listening to the talking heads on CNBC-TV?... Read More

Online Trading Strategy: Collecting Cash when Stocks Go UP - It PAYS to Know More than Others

When it comes to stock market trading it PAYS to... Read More

Mindset

In 1960 an engineer working for a watch company in... Read More

Invest In The Stock Market For The RIGHT Reason, Using The RIGHT Choices

Invest in the stock market for the RIGHT reason, using... Read More

Price Targets

Every day in any financial publication you will find the... Read More

Getting Even

I know there are a lot of you out there... Read More

Small-Cap Stocks: The Beginning of the Journey

When an individual investor wants to roll up his sleeves... Read More

Price to Earnings Ratio - P/E

After finding the price of a particular stock, usually the... Read More

Investing in the Stock Market

From the book 'The Stockopoly Plan' by the author Charles... Read More

Planning Your Dive and Diving Your Plan ? Trading!

A colleague of mine just returned from a scuba diving... Read More

Two for the Money

Look back over the years and try to remember how... Read More

Inertia

One of the basic laws of physics is that a... Read More

Buy and Hold Investment Philosophy

Wall Street has been preaching the doctrine of Buy and... Read More

What Can Model Airplanes Teach You About Trading?

I was devastated!I just couldn't believe it. I was 10... Read More

How to Maximize Your 401k Mutual Fund Returns

When it comes to 401k's there is an overabundance of... Read More

The Big Bad Bear

The big bad bear is stirring again. So far he... Read More

When Should I Sell?

People are always asking me when should I sell my... Read More

Chart Reading

As an investor you will want to check out any... Read More

Struggling Stocks, Booming Commodities

04/28/2005NASDAQ dropped -12.5% year to date in 2005. S&P500 index... Read More

Jack and Jill

Jack and Jill went up the hill to fetch a... Read More

Choosing a Stock Broker

If you were to find that you had some severe... Read More

Moving Averages

Every day on CNBC-TV they show a 200-day moving average... Read More

Fake Money

Reach in your pocket and take out that big roll... Read More

Red, Green, Yellow - or - Stop, Go, Go Very Fast: Which Describes Your Online Trading?

Ever notice how behavior in one area of life can... Read More

led induction lighting Pete's produce ..
led induction lighting Pete's produce ..