Performance Chasing: A Losing Strategy
"Performance chasing" as a strategy for selecting mutual funds is seldom if ever a good idea. In 2008, it was a disaster.
Subscribers to "trend following" investment techniques need only look at the accompanying table for compelling evidence that the strategy can easily lead to disaster.
The table includes the 21 non-leveraged retail stock mutual funds that gained more than 50% in 2007. The momentum of each collapsed, unable to withstand the grasp of the 2008 bear market.
Not only did each of the funds fall victim to the downdraft, but each sustained a loss of at least 10 percentage points worse than the 37% setback suffered by S&P 500 total-return index. All but one tumble took double-digit percentage hits during the year's brutal fourth quarter.In every case, the inertia from 2007 failed to provide enough resistance to the subsequent collapse to enable the fund to finish the two-year stretch with a positive overall return. Often masked in euphemisms such as "momentum investing," performance chasing is seldom profitable for the long term; and it can be especially destructive at major junctures in the market. In 2007, the funds on the list might have seemed irresistible to many investors. It is hard to see how Asia could head anywhere but higher -- especially China. "BRIC" funds that invest in Brazil, Russia, India and China were the fashion of the moment. Natural resources, especially energy, would benefit forever from constantly rising demand by industry and consumers. Uber-manager Ken Heebner's inspired short sales would immunize his CGM Focus Fund (CGMFX) from market setbacks. It didn't work out that way, and investors are forewarned that hopping aboard the latest market fad is more likely to lead to disaster than success.
Select the service that is right for you!COMPARE ALL SERVICES
Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.
- Real Money + Doug Kass + 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV