It’s tornado and thunderstorm season here in Texas, which makes May
and June a busy season for storm chasers. Storm chasers are those who
literally, in vehicles or on foot, follow the path of storms for
personal or scientific observation. Those who do it regularly find it
thrilling. Most others, however, see it as a dangerous pastime, which
makes it very similar to another kind of chasing.
Return chasing is the movement of assets between funds based on their
past success, in hopes that success will continue and be profitable for
the investor. It, too, is a dangerous pastime. Most return
chasers could learn from these guidelines and observations – advice
given to storm chasers – in an article entitled, "Storm Chasing
with Safety, Courtesy and Responsibility."
Chasing is mostly frustration and failure. One of the best
examples of return-chasing futility came from a recent USA Today
article. The author took a look at the 12-month period leading up to
March 2000 (the height of the tech bubble).
Investors put $228 billion into the 50 best-selling mutual funds from
that period. Now, five years later, those same funds are down an average
of 42%. Only two have shown a gain in the past five years. Investors who
jumped on the bandwagon in March 2000 and bought into the most popular
funds would now need gains of 271% just to break even.
Chasing can become a dangerous obsession. Media hot lists are
prevalent because financial editors and program directors are aware of
the addiction investors have for predicting outcomes and beating the
odds. The investing world, the media and Wall Street are so highly
skilled at feeding this desire that success in the active management
realm appears to be reality.
Sudden, instinctual actions are quite dangerous at the best of times.
Investing decisions fueled by emotion, hunch, instinct or whim seldom
pay off. Reallocating assets based on the latest positive rating or
yesterday’s returns consistently puts return chasers into a buy-high and
sell-low pattern. It’s the exact opposite of any investor’s objective.
Look all around. Don’t get trapped into looking fixedly at one part
of the scene in front of you. A fund performing well today will
likely not continue that same level of success in the long run. Take,
for example, the top ten US equity funds (based on annual return
percentage) between 1996 and 1999. Those same ten funds saw their
performances plummet between 1999 and 2002. If you picked the number one
fund in 1999, that same fund would rank 841st just three years later, a
devastation to any portfolio.
Those unfamiliar with chasing may not be able to comprehend their
danger until it’s too late. No one wants to reach retirement and
realize they aren’t going to have enough money to maintain their cost of
living. No one wants to be told they missed out on market return because
they were too busy chasing the latest, hottest or most popular
investments. Those with a long-term plan, however, know their course and
avoid financial hailstorms.
Know when you’ve put yourself in a dangerous situation and have the
courage and wisdom to back off. The antidote to return chasing is
the Market Return PortfolioTM which, when properly executed, gives
investors market return with market risk and that only. And, it
certainly beats the advice given to storm chasers when they’re faced
with danger: Shelter in a ditch should be considered as a last,
desperate alternative.
