“Don’t chase returns.” It’s a mantra heard everywhere in the investment industry, but people still do it. If experience hasn’t already taught you the hard way, here’s the St. Louis Fed with the hard research proving it: If you’re chasing returns, you’re going to be months late.
A few months ago, we highlighted research showing how much chasing returns in equity mutual fund investing can reduce performance, noting that this behavior had cost investors around 2 percent per year over the period 2000-2012. New research over a longer period of time shows similar results.
In a recent Economic Synopses essay, YiLi Chien, a senior economist with the Federal Reserve Bank of St. Louis, examined investment strategies and therelationship between returns and equity mutual fund flows for the period 1984 through 2012. Chien found that current equity flows were positively correlated with stock returns from one and two quarters ago, with correlation coefficients of 0.38 and 0.31, respectively.1
Chien concluded, “Ultimately, this analysis shows that poor investment timing caused by return-chasing behavior has a significant impact on portfolio performance.”