Don’t Chase Transitory Performance

June 6, 2014
by Michelle Perry Higgins

Start Shopping for Long-Term-Care Insurance at 45Certainly one question you should ask of a top-performing fund before investing is whether the past year is representative of the fund’s performance over a longer time period against the appropriate benchmark. Being a top performer for one year may be a matter of luck, not skill.

Another question you should ask is whether the style-box or sector the fund represents is the “flavor of the year.” Certainly, biotechnology was hot in 2013. But so far in 2014, not as much.

The major problem with picking a one-year top performer is that you may be chasing performance that could be transitory. To avoid chasing performance, you need to ask yourself  if you have an analytic framework that you apply to the funds you choose in order to remove emotion (such as feelings of regret or missing out) as much as possible from the decision-making process.

Note: Read the fund’s prospectus prior to any fund purchase.