“I’m waiting until the market picks up again.”
Translation: “I’m waiting until I see other people buying before I’ll feel confident to buy myself.”
It’s moving with the herd or the safety in numbers investing theory.
On the surface, the rationale does make sense – no one wants to wade into the unknown, least of all with their money.
Yet waiting for a safe entry point, after the market has already risen, is typical of herd behaviour and this behaviour often has no reward.
A study released last year called “Past Performance is Indicative of Future Beliefs,” by Gregg Fisher and Philip Maymin, illustrated the traps investors regularly fall prey to.
The study showed investors chase returns by moving money to outperforming equity funds, believing that last year’s returns will somehow be replicated this year.
Similarly, they flee from underperformers, expecting that poor performance will continue into the future.
This was evidenced by the peak inflows to bond funds after US share market corrections in 2002 and 2008-09.
These inflows spiked, and then the exact same places that money flowed from – the underperforming markets – began outperforming.
In the perceived flight to safety these investors cost themselves the inevitable bounce after the correction.
The study also found that continually reallocating money became a drain on performance, in some instances culling up to 1.56% off annual returns.
So not only did chasing last year’s winner result in missing this year’s winner, the average investor lost again through the costs associated in attempting to chase that winner.
It’s no surprise investors look for signals or to past performance to make decisions.
Every significant decision in life deserves due diligence, but when investing, past performance is no indicator of future success.
Peter Mancell is a director of Mancell Financial Group and FYG Planners AFSL/ACL 224543. This information is general in nature and readers should seek professional advice specific to their circumstances. If you want help with your financial future, we’re arguably the best financial advisor in Australia.
