Chasing Performance Doesn’t Pay Off? Who Knew?

All we can do is point to the research, research that shows up everywhere.

Below is an excerpt from a recent paper that every investor should read, The Harm in Selecting Funds That Have Recently Outperformed.

  • “Our results pose a challenge for asset owners. If the results are accepted at face value, and if past performance is used at all for hiring and firing managers, it is the best-performing managers who should be replaced with those who have performed more poorly. Despite our findings, a policy of firing successful managers and replacing them with poor performers is not likely to gain widespread acceptance.”

The truth is, you don’t need to go through the drastic and counter-intuitive approach of hiring poor performing managers and firing great performing managers. If an investor just avoids hiring and firing based mainly on performance they’ll get most of the way there. Unfortunately, this advice seems to fall on deaf ears, and the behavior of buying high and selling low continues its perpetual cycle.

At least it gives us something to continually write about…