Investment Mistakes to Avoid: Chasing Returns

Every investor feels it, at one time or another — return envy.

You might be in a mutual fund that has given you great reason to rejoice over the decades. Still, it gnaws at you to think about how one tech stock has given its investors double what you got in the past year.

Or you make the mistake of comparing strategies with a sibling or pal, only to be regaled with stories of eye-popping gains in some unusual new investment idea, a cryptocurrency coin or flipping houses on the weekends.

Professional investment managers fall prey to the same pressures. They ride herd on billions of dollars and make that money grow year in and year out. But, eventually, someone asks how they failed to recognize the future success of one sector or another.

You did fine, but you could have done much, much better.

That feeling of loss, illusory as it might be, is real. Sure, you made a double-digit return, but it would have been sweeter had you only managed to own more of that one celebrated stock!

What happens next is the problem. Managers of money, both small-time retirement investors and professionals on Wall Street, do this all the time: They jump on the bandwagon of whatever is working now.

“Chasing returns” is the habit of seeking out the new, next big thing. It might be that you meant to buy the stock earlier and just didn’t, or that you are finally caving to the pressure to join the crowd.

Then you do it, and the stock goes up! Hurrah!

The problem, of course, is that you’re not the only one joining the party late. So of course the stock continues to rise as new investors join you in droves, buying whatever the latest investment craze might be.

Unloved

Eventually, of course, there are no new investors. The next likely direction is down. Then a reversal turns into a rout. The original investors cash out and the Johnny-come-lately folks panic and sell as well.

Do this over and over and, while you might be “right” and make a little money in some cases, most likely you will find yourself in the situation described above: a day late and rushing to the exit many dollars short of your initial investment.

What investors actually should do is the opposite of chasing returns. It’s far better to buy an unloved asset and wait than chase the latest hot tip to oblivion.

Buy low and sell high, right? However, rather than seeking out stocks that have fallen on an individual basis, it’s often best to think in asset classes and to simply rebalance one or twice a year.

Stocks high and bonds low? Sell some stocks and buy bonds. Real estate had a hot year? Take some profits and pick up whatever in your portfolio has lagged.

Over time, research shows, just rebalancing steadily is enough to capture down markets and thus own more of an out-of-favor investment. Eventually, they recover and you stand to profit from the turnaround.

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