Why Investors Keep Chasing Last Year's Best Performer

The investment that performed best yesterday can look incredibly convincing today. That's exactly what makes performance chasing so tempting.

The attraction of the rear-view mirror

A recent performance ranking can make one investment look obviously better than another. But the question 'What performed best?' is different from 'What is appropriate for my portfolio going forward?'

Performance is information. It is not a complete decision framework.

Past performance can help us understand how an investment behaved, but it cannot tell us with certainty what will perform best next. Investment outcomes depend on market conditions, asset allocation, investment style, valuation, risk and many other factors.

Why do we chase performance?

Recent success can feel like safety. Investors naturally pay attention to what has just worked and become cautious around what has recently disappointed. This can create a cycle of buying after strong performance and selling after weak performance.

The problem with looking only at rankings

A ranking tells you what happened over a selected period. It does not tell you what risk was taken, what market conditions helped, what the investment owns today, whether it overlaps with your portfolio or whether it fits your goal.

The winner today may be the result of yesterday's environment

A particular style or asset class may perform exceptionally well because the market environment favours it. The environment can change. Buying after a strong run may mean buying after a large part of the performance has already occurred.

The “best fund” is not necessarily the best fund for you

The right question is not simply which fund is best, but best for what goal, timeline, risk level and portfolio role. A good investment in isolation can still make a portfolio more concentrated or complex.

What happens when you keep switching?

Repeatedly moving from one recent winner to the next can turn investing into a cycle of chasing. The underlying investments may each be reasonable while the decision process becomes unreasonable.

Your return can be very different from the investment's return

An investment has a reported return, but your personal outcome also depends on when you entered, added money, stopped, switched or withdrew. Repeatedly buying after strong performance and selling after disappointment can hurt the investor experience. “But what if the fund really is better?” Performance should not be ignored. Consistent behaviour, coherent strategy and reasonable risk-adjusted outcomes can all matter. But the decision should still be whether the investment deserves a place in your portfolio, not simply whether it beat everything else last year.

What caused the performance?

Before switching into a recent winner, understand whether its performance came from asset allocation, sector exposure, a particular market cycle, valuation, a temporary event or another factor.

Look at the portfolio, not just the investment

A new investment can duplicate existing holdings and increase concentration rather than improve diversification. Investment decisions should be evaluated at the portfolio level.

What if your existing investment is underperforming?

An underperformer deserves a review when there is a meaningful concern about its mandate, strategy, risk, portfolio or suitability. Underperformance alone is not necessarily a reason to switch.

Underperformance isn't automatically failure

Every investment strategy can have periods when it performs better or worse than others. If you choose an investment for a particular philosophy, you should expect that philosophy not to lead every market cycle.

What about changing funds after several years of poor performance?

Long-term underperformance can deserve a serious review. Look for persistent and meaningful issues rather than automatically replacing an investment with the latest winner.

Performance chasing can also happen outside mutual funds

The same behaviour can occur with stocks, gold, real estate, fixed income and speculative assets. Recent performance can create urgency, but urgency is not the same thing as suitability.

Don't confuse “missing out” with losing money

If an investment rises after you decide not to buy it, you missed an opportunity; you did not lose money. Confusing these can lead to regret-driven decisions.

The danger of performance-based regret

Waiting, seeing a market rise and then investing because of regret can produce a decision that was driven by emotion rather than the original financial plan.

A better question than “What performed best?”

Ask: What is the goal? What is the timeline? What risk can I handle? What role does this investment play? What do I already own? Why did it outperform? Is that driver likely to remain relevant? What happens if it underperforms next year? What would make me exit? Would I choose it without knowing its recent return?

The “remove the return” test

Imagine the recent performance number is hidden. If you still understand why the investment belongs in your portfolio based on its objective, strategy, risk and role, your decision may be less dependent on recent performance.

What this does NOT mean

Avoiding performance chasing does not mean never changing an investment, ignoring performance, keeping every investment forever or treating all funds as equal. Comparison and review are useful; recent performance should simply not become the primary reason for a decision.

A better investment-switching framework

Before switching, write down: Why am I leaving? Why am I entering? What role will the new investment play? What changes in my portfolio? Consider allocation, concentration, risk, liquidity, overlap and complexity.

North Horizon perspective

Investment decisions should start with the job your money needs to perform, not with a leaderboard. A recent winner can be worth studying without automatically being worth owning.

A simple rule to remember

Before chasing an investment because it has performed well, ask: 'If this investment had not recently performed well, would I still want it in my portfolio?' If the answer is no, pause.

The North Horizon takeaway

Yesterday's winner is a fact, not a forecast. Good investing is about building a portfolio where each investment has a reason to be there and reviewing those reasons when circumstances change.