Amnesia antidote: don’t chase returns, stick to your plan

We may be forgetting the most important rule when it comes to our investments. Sheetal Radia discusses what your priorities should be.

string-cropped

As we come to the end of 2013, no doubt the media will be full of stories about the best and worst performing investments in 2013.  Often investors (even institutional ones) fall into the habit of investing in assets or funds that have done well in the recent past and switch from existing ones that have underperformed. As we all know past performance is no guide to future performance.  Yet investors still chase historical returns.

These value-destroying decisions can be attributed to a variety of factors ranging from: the fear of missing out again, following the herd or even being persuaded by the marketing surrounding a fund or funds.

“Look at market fluctuations as your friend rather than your enemy. Profit from folly rather than participate in it.”

Investing requires patience and discipline and should be tailored to a person’s requirements and circumstances. Each individual’s situation is often independent from what is taking place in the financial markets.  By chasing markets one deviates from their own financial plan. In addition, the comfort of investing in funds that have done well in the past is more than offset by the costs and risks added to the portfolio.  Investment fads are not new, think about those that chased technology investments in 1999 before the dot.com bubble burst.

Similarly many exited the markets in 2008 when perhaps, like Warren Buffet, the opposite should have been considered.

So what should you do?

1.      Favour a long-term investment horizon

2.      Know your attitude to risk

3.      Understand your capacity for losses and how you will respond to them

4.      Patience and discipline are paramount to help your portfolio meet your goals.

5.      Do not chase the market or follow investment fads. Only change your portfolio if your circumstances change

In the words of Warren Buffet: “Look at market fluctuations as your friend rather than your enemy. Profit from folly rather than participate in it.”

Speak to a whole of market financial adviser, to make sure you make the right decisions for your investments.