Chasing Investment Returns, Stop Wasting Your Time
With the NASDAQ and the S&P 500 off to great starts this year, jumping from one investment strategy to another in pursuit of higher returns can be detrimental to long-term investment performance. While it may seem tempting to chase the latest fads or attempt to time the market, such behavior often leads to suboptimal outcomes. Let’s explore the reasons why chasing investment returns through frequent strategy changes can be counterproductive and how it can negatively impact long-term investment performance. I am sure many of you are thinking, why didn’t I invest in the NASDAQ index? It’s up about 25 percent year to date as of this writing.
First, it is important to understand that investment returns are inherently unpredictable and volatile. Markets fluctuate, and short-term performance can be influenced by various factors such as economic conditions, geopolitical events, and investor sentiment. By constantly switching strategies based on recent performance, investors expose themselves to the risk of making impulsive decisions driven by short-term noise rather than long-term fundamentals. This behavior is often referred to as “chasing the market” or “performance chasing.”
One of the main pitfalls of chasing investment returns is the tendency to buy high and sell low. When investors chase returns, they often enter into an investment after it has experienced significant price appreciation, driven by the recent success of the strategy. However, this means that they are buying at high valuations, increasing the risk of potential losses if the investment subsequently experiences a downturn. Conversely, when a strategy underperforms, investors may be inclined to sell, locking in losses, and missing out on potential future gains. This pattern of buying high and selling low erodes overall returns and can significantly impact long-term performance.
Moreover, constant switching of strategies will incur transaction costs and fees, which eat into investment returns. Each time an investor changes their investment approach, they may need to sell existing holdings and purchase new ones. These transactions typically involve brokerage fees, bid-ask spreads, and other transaction costs, all of which reduce the net returns earned by the investor. Over time, these costs can accumulate and significantly diminish the overall investment performance.
Another factor to consider is the detrimental impact of emotional decision-making on investment returns. Frequent strategy changes can be driven by emotional reactions to short-term market fluctuations. Investors may succumb to fear or greed, resulting in hasty decisions that are not aligned with their long-term investment goals. Emotional decision-making often leads to suboptimal outcomes as it disregards sound investment principles such as diversification, asset allocation, and disciplined investing. By succumbing to emotions and chasing returns, investors are more likely to make poor decisions that negatively affect their investment performance.
Furthermore, switching strategies frequently disrupts the benefits of compounding returns. Compounding refers to the process of reinvesting investment gains to generate additional returns over time. By constantly moving in and out of investments, investors interrupt the compounding effect and miss out on the potential exponential growth of their investments. Long-term investing success relies on the power of compounding, and abandoning investments prematurely can significantly hinder wealth accumulation over time.
Lastly, frequent strategy changes may result in a lack of consistency and discipline in investment decisions. Successful investing requires a well-thought-out investment plan based on a clear understanding of one’s risk tolerance, financial goals, and time horizon. Consistency in following an investment strategy enables investors to ride out short-term market fluctuations and stay focused on their long-term objectives. Frequent changes in strategies indicate a lack of discipline and may prevent investors from fully realizing the benefits of a well-executed investment plan.
In conclusion, chasing investment returns by frequently jumping from one strategy to another can be detrimental to long-term investment performance. Such behavior often leads to buying high and selling low, incurring transaction costs, succumbing to emotional decision-making, disrupting compounding returns, and lacking consistency and discipline. Instead, investors are better served by adopting a patient and disciplined approach, focusing on long-term investment objectives, and staying the course in the face of short-term market fluctuations.
