Points of Few: The Investor Bandwagon’s Broken Wheels

“Championing the cause of contrarian investing since 1973”

By Alan Steel

It’s easy to look at stocks that have performed well of late and think, “I’m gonna get me some of that.”

But that type of bandwagon thinking, where you set about chasing investments based on recent past performance, is a bit like driving a car using only the rearview mirror; sooner or later that journey is going to end badly.

It’s like that old (and true) adage about investing: Once it becomes a headline the opportunity has passed.

My Managing Director Steve Forbes puts a fine point on this when he writes: “Last autumn I recommended a portfolio of funds to a new client.  They knew quite a bit about investing so took an interest in my suggestions. 

“Two of the funds I had recommended had been poor performers in the last twelve months and they indicated that they had reservations about these being included in the portfolio.  

“They were, however, very happy with the others as they had all performed well in that period.

“Thankfully they agreed to stick with my suggestion and since the investment commenced the two funds they had concerns about have been the best performers by some margin.  

“Why? I would love to say I knew they would be the best performers in the short term but of course I didn’t.  

“What I do know is that markets change and perform in cycles, and designing a portfolio is trying to ensure that you have a range of different funds that are managed in different ways.  

“Simply investing in the fund(s) that have performed best in the last twelve months is almost guaranteed to lead to lesser returns in the long term.”

Alan here – Simply put, jumping on bandwagons leads to broken wheels.

You can read more of Alan Steel’s investment insights on his Points of Few blog here.

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