| |
| |
|
|
Stocks and Mutual Funds |
|
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: 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.comSubscribe 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.
MORE RESOURCES:
Stocks-Mutual-Funds - Google News |
|
|
|
RELATED ARTICLES
How (NOT) to Buy Mutual Funds When it comes to mutual funds, there is a lot more to success than just finding a good one. Sad investment stories like the following are all too common. The Stock Market is a Roller Coaster: Prepare for the Ups and Downs IT'S REMINISCENT OF THE OLD children's tale about an old Chinese farmer who tells his friends his story, and they enjoin with "That's good" or "That's bad" on alternating lines:Farmer: My horse ran away.Friends: That's bad. Mutual Fund Commissions You have heard about a particular mutual fund from a friend, saw it advertised on TV or read about it in some publication thought it would be a good buy. Next you call your broker to get his advice before you buy because he is an expert and is there to help you make money. Understanding the Bulls and the Bears If you've ever flipped on the television to CNN Financial or paged through the finance section of your local newspaper, you may have seen or heard references made to "the bulls and the bears." If you didn't know what was meant by those terms, you're about to find out. Stuff I continually hear from economists, talking heads, other market letter writers, analysts and assorted "experts" that I need to know all kinds of "stuff" about the stocks and mutual funds I am going to buy and I should keep up with them on a regular basis.What is this important "stuff"?Let's see. Pathways During our travel down life's path we come to many places where the trail divides and we must make a decision. Some involve psychological (emotional) choices - marriage, divorce, leaving home, career changes, etc. Commoditizing the world Let's discuss commodities; with the latest Enron situation, it is important to understand the way things work. A commodity is anything useful, especially a transportable agricultural product or mining product. Analyst Reports When you become interested in a stock or mutual fund you can call your broker and he will send you reports on how the company is doing, what their management is like and what might be the projected earnings for the company and how the industry is doing. Great information. VooDoo Training For the Stock Market If you go to Haiti or other places in the Caribbean you may run into the Voodoo tradition of magic. There are long and mostly noisy rituals with the medicine man spouting words that bring great power and conjure up whatever it is the supplicant desires. Some Good News for A Change Before we get into all the good news out there, let us first take a look at what the term "news" really means. By definition, the term "news" means the exception to the norm. Gurgle Gurgle Caught in a whirlpool and being sucked under. No life vest or other device to save you. The Next Bull Market We are already in it, but you can't see it. It doesn't look like the one we had in '99. Lemmings Are Gathering Before they go over the cliff to their destruction these little furry ones get together for a party and celebration. Each tells the other how smart he has been with his investments and buying and selling of stocks and real estate. Discipline One of the great "secrets" of successful people is discipline and it doesn't make any difference whether it is manufacturing, processing, servicing or investing in the stock market.Before you can have that discipline you must have a successful plan and stick with it. Shorting Stocks - The Basics, Part I of II What does it mean to short a stock?This means that you borrow the stock from your broker to sell to a third party. The idea is to buy back the stock at a lower price, returning the shares to your broker while leaving the remaining cash in your account as a profit. Robert Rodriguez Weathers the Stock Market Robert Rodriguez likes to buy stocks at their lows. When there are not enough stocks hitting new lows, he closes his fund and piles up cash. Whos Calling? Its dinnertime and the phone rings. It's Joe Noname with SuchNSuch Investment Company and has he got a deal for you. Are You A Stockaholic? Today's society gives special recognition to alcoholics, sexaholics, binge-aholics, shopaholics, chocaholics and other "-aholics". What about stockaholics? Stockaholics are people who are overly obsessive about their stock market investments. Trading as a Business What can I expect to make my first year of trading?We get questions like this one quite often. We find that most aspiring traders don't have a clue as to what to expect from the market. Maximizing a Stock Market Investment Maximizing a stock market investmentThere are several factors an investor in the stock market should consider for a maximum return on an investment:1. All stock purchases should be commission-free.
|
||||||||||||||