Given many investors’ goal of maximizing return, it’s not surprising that some investors select funds based primarily on the funds’ recent performance record. But is that a prudent strategy?
This research note simulates a performance-chasing strategy among U.S. equity mutual funds for the ten years ended December 31, 2013; we then compare the results with a buy-and-hold strategy over the same period. Our analysis shows clearly that buy-and-hold has been the superior approach.
For investors using active management, it’s critical to understand that short-term performance should not be the sole reason to enter or exit a mutual fund. To improve their chances of succeeding with active funds, investors must be willing and able to avoid the “thrill of the chase.”
The Winner : Buy and Hold
Investors are naturally drawn to top-performing actively managed funds. The result for many is a performance chasing approach in which current funds are sold from the portfolio to make room for recent “winners.”
Vanguard research demonstrates that this behavior is misguided, as a buy-and-hold strategy has outperformed performance-chasing over the past decade in all nine Morningstar equity style boxes.
Our research furthermore reaffirms the importance of an oft-cited but frequently ignored legal disclaimer about investing: Past performance is not necessarily indicative of future results. This statement certainly appears to hold true among recent top-performing funds, and investors are well-advised to remind themselves regularly of it.
To improve the odds of their long-term investment success, investors should understand that some periods of belowaverage performance are inevitable. At such times, investors should remain disciplined in their investment approach and avoid the temptation to chase performance.
Source : Vanguard.
Elias Abllah, Personal Finance