October 23, 2009
Number three on my list of the top 10 mistakes that investors make is performance chasing. The quickest way to make a million investing in mutual funds is to invest two million in yesterday’s winners. No matter how often investors are warned not to select funds on the basis of past performance, they do just that-often with devastating consequences. The problem here is that success attracts inflows, which tends to limit both the agility and opportunity set of portfolio managers. When assets under management become bloated, portfolio managers often do one of two things: they either hug the index or take on imprudent risk in an effort to outperform the index. The best-case scenario is that you overpay for an index fund. The worst-case scenario … well, I would just point you to the Legg Mason Value Trust fund-down 37% over the last three years, with a peak-to-trough decline of almost 73%.
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