Every single day, I get asked these questions: What mutual funds should I invest in? What is best? What do you like today? What do you think of this, that or the other fund? Where do you see the best opportunities? If you are ‘normal’, you will be thinking these same thoughts.
Here’s the unfortunate reality of the whole thing. There is no such thing as the best investment and even if there is such a thing, no one has the ability to predict what it will be ahead of time.
In the next few weeks, I will walk you through some of the research we went through to writing my book Mutual Fundaments. I will discuss some of the dos and don’ts of selecting mutual funds. In this article, I want to start by looking at the three biggest mistakes investors make:
This is by far the biggest mistake investors make. According to our research, there is over an 80% correlation that last year’s best performing investments will be the most popular investments. Think back to the Emerging Markets in 1993, Financial Services in the mid 1990s and Technology in the late 1990’s. Today investors are flocking to fixed income. If chasing performance is your key strategy to selecting investments consider these facts:
- Everything goes in cycles (interest rates, stock markets, sectors, mutual funds, economies, businesses, etc). What goes up can come down. Just because it was the best, does not mean it will stay the best.
- If it were that easy, we would all do it and chasing performance would always work. Well, we all do it but unfortunately, it rarely works.
- Short-term performance is a random walk. It cannot be predicted.
- Chasing performance does not work. According to our research, you have less than a 10% chance that this years top performing investments will be next years top performing investments. In other words, you have a 90% chance of being wrong.