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Don't Get Suckered: Last Year's Fund Winners Often Go Bad
Superior portfolio performance is a rare commodity for individual investors, for mutual funds, for investment categories, and even for the marketplace itself. At some time, usually now rather than later, the iron law of regression-to-the-mean gets enforced.
The referenced article captures that attribute. As Mark Twain observed: “History may not repeat itself, but it rhymes”. Markets change and often change in a supercharged way. Warren Buffett remarked that “The dumbest reason in the world to buy a stock is because it’s going up”. Yet many of us do exactly that.
We love winners and assume their continued winning ways. The odds against that happening are not all that high. Academic and industry studies demonstrate the regression rule time and time again.
The referenced article cautions against being “suckered”. Yet we are strongly motivated to buy last years winners. That’s a failed strategy that seasoned investors understand. Seasoned investors who populate MFO are familiar with the SPIVA scorecards and the Periodic Table studies that show how fragile persistency really is. For the newbies to the MFO site, here are Links to both a representative and recent SPIVA report and a Periodic Table:
Indeed we are suckers for the hot hand. When searching for new investment opportunities we are often drawn like flies to honey to those stocks and those funds that occupy the top of the returns list.
What these types of scorecards show is that performance persistence is an illusion. The rotation is amazing; the table entries quickly reverse themselves.
Studies consistently demonstrate that the average active mutual fund underperforms its Index benchmark. Further, the average individual investor underperforms the mutual funds that compose his portfolio. We lose returns on several dimensions because of impatience and poor timing.
That’s the sad side of the story that victimizes the general investment public. Hopefully, MFOers are more disciplined and less momentum driven. I suspect that our portfolios contain a higher fraction of Index products, and that we hold them for longer periods. The general mutual fund data suggests that this is happening among both institutional and private investors. Good for all of us; our sucker quotient is decreasing.
EDIT: It's tough posting while watching the pro football games with a cheering group of fans.
Comments
I agree this is not a new finding.
Superior portfolio performance is a rare commodity for individual investors, for mutual funds, for investment categories, and even for the marketplace itself. At some time, usually now rather than later, the iron law of regression-to-the-mean gets enforced.
The referenced article captures that attribute. As Mark Twain observed: “History may not repeat itself, but it rhymes”. Markets change and often change in a supercharged way. Warren Buffett remarked that “The dumbest reason in the world to buy a stock is because it’s going up”. Yet many of us do exactly that.
We love winners and assume their continued winning ways. The odds against that happening are not all that high. Academic and industry studies demonstrate the regression rule time and time again.
The referenced article cautions against being “suckered”. Yet we are strongly motivated to buy last years winners. That’s a failed strategy that seasoned investors understand. Seasoned investors who populate MFO are familiar with the SPIVA scorecards and the Periodic Table studies that show how fragile persistency really is. For the newbies to the MFO site, here are Links to both a representative and recent SPIVA report and a Periodic Table:
http://www.spindices.com/documents/spiva/spiva-us-year-end-2014.pdf
https://investment.prudential.com/util/common/get?file=1D065355D2CC360385257B7D00536F8A
Indeed we are suckers for the hot hand. When searching for new investment opportunities we are often drawn like flies to honey to those stocks and those funds that occupy the top of the returns list.
What these types of scorecards show is that performance persistence is an illusion. The rotation is amazing; the table entries quickly reverse themselves.
Studies consistently demonstrate that the average active mutual fund underperforms its Index benchmark. Further, the average individual investor underperforms the mutual funds that compose his portfolio. We lose returns on several dimensions because of impatience and poor timing.
That’s the sad side of the story that victimizes the general investment public. Hopefully, MFOers are more disciplined and less momentum driven. I suspect that our portfolios contain a higher fraction of Index products, and that we hold them for longer periods. The general mutual fund data suggests that this is happening among both institutional and private investors. Good for all of us; our sucker quotient is decreasing.
EDIT: It's tough posting while watching the pro football games with a cheering group of fans.
Best Wishes.