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D.Muthukrishnan (Muthu), Certified Financial Planner- Personal Financial Advisor

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Don’t chase performance

Posted by Muthu on January 6, 2017

“Chasing fund performance is often the quickest way to hurt your mutual fund returns.”- Arthur Levitt

Many investors get bored with holding the same portfolio. That too if a fund underperform, they want to quickly change to a better performer. Once a portfolio is a chosen, we suggest changes only infrequently. This is because all funds and fund managers go through periods of underperformance. No fund is consistently on top every year. Last year’s top performer can be this year’s bottom performer. Last year’s poor performer can be this year’s best performer. Though we do have yardsticks in funds selection; it is more of what not to choose and what to avoid. By minimising errors, and giving a diversified portfolio of 5 funds from five different fund houses, we aim for a decent return over 10 year period or so.

Our biggest value addition is we interfere less in your wealth creation journey. We also ensure that you do not become a hindrance in your own wealth creation. Since you are only used to us, you don’t know how uncommon this is. Someone who is our client for last 10 years would hold most of the same funds we selected at the beginning. Holding a portfolio for 10 years is uncommon in the market. The average equity fund holding period is only around 18 months. By our approach, we ensure that the return you earn is equal to fund’s return over a 10 year period. What is the big deal in this? Very few investors earn what the fund earns. There is a huge gap between investor’s performance and investment’s performance as people redeem after bad years and invest after good years. We ensure that you don’t fall into this trap. For our clients, the investment returns and the investor returns are the same.  It would definitely sound boastful, but the fact is this  places you among a very small group of successful investors.  

Please read this article which talks about a study done by Vanguard.

I’ve given some excerpts below.

“The other study was authored by U.S. ETF giant Vanguard, which looked at the histories of more than 3,500 equity mutual funds in order to compare a basic buy and hold strategy to a frequent-trading strategy that simulated the effect of performance chasing.

The study looked at three-year rolling return performance between the years 2004 and 2014, across nine equity groupings (this is roughly in-line with the time the average fund investor holds an equity mutual fund). The simulation also tracked the Sharpe ratio of the average fund in the category, a measure of risk-adjusted return.

The “rules” of the buy and hold were relatively simple: the simulation invested in any fund, and held it to the end of the time period. If the fund was discontinued, the simulation simply reinvested its money into the median-performing fund within the grouping.

For the performance-chasing portfolio, the simulation invested in any fund with an above average three year annualized return. If that fund turned in a below average performance for the next three year rolling period, that fund was sold and the simulation reinvested the proceeds in equal amounts into in the top twenty funds in the asset grouping.

At the end of the day, the simulation produced a total of more than 40 million return paths–a pretty good yardstick for measuring whether performance-chasing or buy and hold is the more sensible strategy.

Category            Buy & Hold      Performance chasing

 Large Blend            6.8%                      4.5%

Large Growth          7.1%                      4.3%

Large Value             7.0%                     4.7%

Midcap Blend           8.9%                     4.9%

Midcap Growth         8.6%                     5.7%

Midcap Value           9.2%                     7.6%

Small Blend             8.9%                     6.3%

Small Growth           8.6%                     5.7%

Small Value              9.3%                     5.8%

The chart above illustrates that buy and hold was the clear winner, beating performance-chasing in all nine style boxes. Note the size of the performance gap between the two strategies.

The Sharpe ratio was better (i.e., higher) for each of the buy and hold portfolios, meaning there was less volatility along with better returns. Talk about having your cake and eating it too! “

We will never chase performance and would not allow you to do the same as well. That’s why you’ve chosen us as your advisor. Our key objective is to ensure that as investors your earn 100% of investment returns without any slippages due to behaviour gap (i.e.) the misbehaviour of chasing performance based on past data.

One Response to “Don’t chase performance”

  1. wapaschalo said

    Are the funds you are recommending to your new clients same as the funds your current clients invested with 10years back ?

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