Investment Pitfall #3: Chasing Performance & Trying to Outsmart the Market

About This Episode

As an investor, it’s natural to want to outsmart the market. When you combine that with the discomfort of a volatile market like we are currently experiencing, it’s easy to see why timing the market and chasing performance are so tempting.

The noise we spoke about in previous episodes always gets louder when we’re in uncertain times. Friends, family and the media are probably telling you to be reactive and, in the moment, their advice sounds reasonable. This time is different, right?

Unfortunately, it’s not. The reactive approach means investors often end up buying and selling at the wrong points and for all their trouble, it can end up costing up to 77% of total returns. Instead, when you experience a bad market event, that’s when you most need to rely on your investment philosophy.

On this episode, Keith and Marcelo talk about why investors try to time the market, how it affects investors’ long term goals, what it means to chase performance, significant investment fads, rallies and busts since the 1990s, why it’s so important to maintain a high level of diversification, and more!

Be sure to join us for our next episode where we’ll finish up the series on investment obstacles by talking about diversification. Thank you for listening!

Key Topics:

• What constitutes an investment mistake (1:18)
• Why it’s important to be aware of investment mistakes (2:22)
• How do investors try to time the market? (3:47)
• The false appeal of timing the market (4:46)
• The two trades at the core of market timing strategies (5:35)
• Why market timing is often detrimental to investors’ long term goals (6:24)
• Market timing versus chasing performance (7:50)
• Significant investment fads, rallies and busts since the 1990s (9:27)
• How stock performance often occurs in cycles (13:06)
• The influences on Canadian investor philosophy (15:07)
• Dramatic stock movement in the last 10 years (15:53)
• Why it’s so important to maintain a high level of diversification (17:08)
• The shift in styles from the 1990s to today (18:07)
• How FOMO leads investors to chase performance (19:04)
• What the data shows about money managers’ performance over time against benchmarks (20:25)
• The counterintuitive evidence on how to select a money manager (22:42)
• The surprising results of Vanguard’s study on the long-term performance of Morningstar-rated funds (24:29)
• How giving in to timing the market and chasing performance impacts you personally and financially (26:36)
• Why awareness is your most important tool for avoiding investment pitfalls (27:31)
• And much more!

Mentioned in this Episode:

• Standard and Poor’s Report | Money managers’ performance against benchmarks
• Vanguard Study | How Morningstar-rated funds performed relative to a style benchmark over three-year periods
• Tulett, Matthews & Associates
• Keith Matthews’ Book | The Empowered Investor: A Guide to Building Better Portfolios