Don’t Chase Performance

 

I really shouldn’t have to write this article. If you look online there are thousands of similar articles all trying to tell people the same thing. In fact, nearly every single investment presentation in Canada contains some form of the same “Past performance is not indicative of future results”.

 

Why is it that we have to keep being told over and over again, and yet we still don’t learn our lesson?

First, let’s look directly at what I’m talking about.

 

You are offered the choice of two investments. Investment A has been declining in value for the past 10 years and is currently worth 70% of what it was worth in 2011. Investment B has been screaming higher over the past 10 years and is currently quadruple the value it was in 2011.

 

 

Now if I were to recommend investment A to someone, they would look at me like a fool. If I were to recommend investment B, they think it’s a wise recommendation.

 

Now, I am no neuroscientist. Frankly, I would probably get laughed off of campus if I even attempted to apply, so feel free to criticize me.

 

The reality is that we often make our decisions based on what we already know and can understand. Our brains often make decisions before we even realize we have been offered a choice.

 

You see, for most investors, somewhere north of 90% of them, they do not have the financial acumen to properly distinguish between two investment choices. Let’s be real those of us who do have the financial acumen do nearly as poorly in making these decisions.

 

 

When our brain doesn’t have all the information needed to make a decision it makes a choice based on the available information that it can understand. Unfortunately, that often results in us choosing investments, because we can understand that they have gone up previously.

 

For whatever reason it feels safer to buy the hot asset that has been going up in value year after year than it does to buy the asset that has fallen in value year after year. When presented with this choice our brain often chooses the emotionally safer choice.

 

We get sucked into the fear of missing out, if only I had bought X 5 years ago I’d be rich!

 

Yet, we all know the mantra to buy low and sell high. The reality? Nobody follows through with it.

 

 

Investing in something just because it has increased in value recently is a terrible investment strategy. So too is investing in something just because it has declined in value suddenly.

 

If your only indication to purchase an investment is because of how it has been performing previously, you need to rethink your decision.