Along with the Financial News pundits, investors have a favorite pastime, choosing to invest in assets that have recently done well. This is a very consistent activity as investors seek to receive better returns. The reverse happens in bad times with low-yielding investments such as cash appearing to be more attractive than investing in stock as they fall in value. Simply put, investors chase returns.
Investing in stocks that just did well, investors are buying after they witness gains and selling after their investments experience a loss. It may feel good to chase returns at the moment but it is very costly to investors. According to Dalbar, Inc., stock investors underperform the S&P 500 by around 6% a year over the past 20 years* due to attempting to time when to buy and sell.
Why We Chase Returns
Here are two main reasons why investors do this time and time again:
- We are influenced by what has just happened. When we try to project the future, our brains are influenced by what we’ve just experienced. Good results today imply that things will be good going forward, and vice versa.
- This is exaggerated by headline news. Our brains love a good story, especially when it’s doom and gloom. We want information so we can understand why things are so bad. When the market goes up, the narrative is often positive, leading us to feel good about the future. When the market goes down, the narrative is almost always negative, reinforcing a negative outlook.
This is normal but not helpful
If you are reading this then you are human and It is completely normal to invest in things we expect to go up and avoid investments we expect will go down. Any rational person would do that as part of their investment strategy. The problem is that markets move quickly and often surprise us. Narratives are wonderful and can be quite accurate in hindsight. They can even boost our confidence in a certain viewpoint, but narratives offer no ability in predicting the future.
This is why I advise you to stick to your plan, remain disciplined, and stay the course. I know this is not easy; it’s tempting to please our minds and feelings but that is why you have me.
Together, we can be aware of common investment pitfalls and ensure that all investment decisions are well-thought and in line with your stated objectives.
- JP Morgan Guide to the Markets. July 2022 edition. Slide 63.
Past performance may not be representative of future results. All investments are subject to loss. Forecasts regarding the market or economy are subject to a wide range of possible outcomes. The views presented in this market update may prove to be inaccurate for a variety of factors. These views are as of the date listed above and are subject to change based on changes in fundamental economic or market-related data.
Investment advice offered through OneAscent Financial Services, LLC, d/b/a Provident Oak Financial, LLC, a Registered Investment Adviser with the United States Securities and Exchange Commission. Registration as an investment adviser does not imply any certain degree of skill or training.