In the ever-volatile world of investing, the lure of rapidly rising markets can be hard to resist. Even the most conservative investors, typically celebrated for their prudence and patience, can find themselves caught in the seductive trap of performance chasing. I have personally seen many succumbing to this; some as recent as a few weeks ago. This phenomenon isn’t just a minor slip in investment strategy—it’s a pervasive disease that threatens the financial health and peace of mind of many.

Understanding Performance Chasing

Performance chasing occurs when investors make allocation decisions based on recent returns rather than on a balanced consideration of risk, return, and personal financial goals. The danger here is two-fold. Firstly, by the time these investors shift their positions, they often buy at higher prices, which may lead to significant losses when the market corrects—as it inevitably does. Secondly, this strategy contradicts the very essence of wise investing, which prioritizes long-term consistency and stability over short-term gains.

The Psychology Behind the Trend

Why do even conservative investors fall prey to this trend? The answer lies in a potent mix of emotional investing and a phenomenon known as ‘recency bias’.

Recency bias leads investors to believe that recent trends will continue into the future, making high-performing investments appear irresistibly attractive. Furthermore, social proof and media glorification of winning stocks or sectors intensify this bias, pushing conservative investors to stray from their disciplined investment path.

Investors may start to wonder if their current financial professionals, with their steady, disciplined approach, are missing out or lagging. Recency bias further fuels this doubt. If everyone seems to be getting rich quick and the media is abuzz with stories of meteoric gains, it’s tempting to think a new professional could provide a fast track to wealth.

The risk, of course, is that in chasing performance, investors may fall prey to those who talk a big game without the experience or strategy to back it up, leading to decisions that stray from a well-considered financial life plan. During such phases, there are some people who even think they know more than their financial professionals.

Performance chasing often ignores the statistical phenomenon of regression to the mean, where extreme performance (good or bad) tends to return to average over time. You might not realize that by the time they invest in a fund or stock due to its stellar performance, they are often buying at a peak before it regresses to its mean performance. This insight can caution against jumping into high-flying investments without considering their potential for normalizing returns. Not understanding this concept also causes investors to prematurely exit underperforming funds.

The Risks of Deviating from Strategy

For investors, the shift towards performance chasing can be particularly hazardous. While the biggest destruction of wealth is caused by mindlessly panicking and exiting a well-diversified portfolio, the second biggest award goes to performance chasing. By moving into higher-risk areas in pursuit of greater returns, they expose themselves to potential volatility and losses, which their portfolios may not be structured to handle.

Chasing performance typically involves frequent trading, but the costs associated with high turnover—such as transaction fees, taxes, and bid-ask spreads—can significantly erode returns. An often-overlooked insight is that the net performance advantage of frequently switching to chase gains usually doesn’t compensate for these additional costs, making a stable, long-term strategy more financially efficient.

How to Avoid the Trap

1. Reaffirm Investment Goals: Always align your investment choices with your long-term financial goals, risk tolerance, and investment horizon. Regularly review these goals as part of an annual financial check-up.

2. Adopt a Disciplined Approach: Implement and stick to a well-considered investment strategy. This might include setting rules for when to buy or sell investments, such as through systematic investment plans (or dollar-cost averaging) , establishing firm criteria for portfolio rebalancing and so on.

3. Educate Yourself: Continuous education on investment principles can fortify you against the temptations of short-term trends. Understanding the historical performance of markets during different cycles can provide perspective and reduce the likelihood of making impulsive decisions based on recent events.

4. Consult with Professionals: Partner with a top-tier real financial professional who can offer not just expertise but also emotional detachment. Someone who is proficient in not only helping you align your use of capital with what’s important to you but also in getting the magic of compounding to work for you by helping you stay invested across market cycles. The guidance of such a professional can be crucial in helping you stick to your strategy and avoid the pitfalls of market timing and many other costly financial mistakes.

The Wise Investor’s Path

Chasing performance is a speculative game that contradicts the foundational principles of real investing. It’s a disease in the world of investing. While it’s natural to feel drawn to the best-performing assets, remember that investing isn’t about winning a race; it’s about finishing your financial journey securely and according to plan.

This is a favourite anecdote of mine from “The Intelligent Investor” book that perfectly captures this insight.

“I once interviewed a group of retirees in Boca Raton, one of Florida’s wealthiest retirement communities. I asked these people mostly in their seventies – if they had beaten the market over their investing lifetimes. Some said yes, some said no; most weren’t sure.

Then one man said, “Who cares? All I know is that my investments earned enough for me to end up in BOCA”.

Could there be a more perfect answer? After all, the whole point of investing is not to earn more money than average, but to earn enough money to meet your own needs.

As Ben Graham says, “The best way to measure your financial success is not by whether you are beating the market but by whether you have put together a Financial Plan and a Behavioural Discipline that are likely to get you where you want to go.”

In the end, what matters isn’t crossing the finishing line before anybody else but just making sure you do cross it.

This is exactly where you should be focused: “Making sure you cross your line”.

Therefore, resist the fleeting allure of market highs; true investment wisdom lies in the quiet courage of sticking to your strategy, especially when temptation is at its peak.