December 2011 Peak View Newsletter
from Jim Onorato
Another month has come and gone and it seems the main topic of conversation, from an investment standpoint, is what is happening in the Eurozone. On days when the news has a positive spin the market rises 1%–2% and when any steps toward a resolution stall, the market falls 1%–2%. Although everyone would like this resolution to be a sprint it is turning into more of a marathon. Another month of the roller coaster ride and the market is almost exactly in the same place it was last month at this time. With all of the volatility that the market has experienced this year, the S&P 500 is only down about 1.5% year to date. Although that is nothing to cheer about, our market has performed significantly better than nearly every other international stock market around the world which has experienced declines in the mid teens or worse.
Chasing Performance
This is the time of year when many investors review their mutual fund holdings in their 401–k's (as well as their personal and IRA accounts) and contemplate making changes to their portfolio. It is very common for investors to look at the recent performance of their current mutual fund holdings and switch out of funds that have recently underperformed their benchmarks and replace them with funds that have recently performed better. This is a classic investor mistake and is referred to as "chasing performance." Many times these "better" funds underperform their benchmarks the following year and the funds that were sold produce the better results. It is human nature to do this, we seem to be wired this way – sell low and buy high. It has been my experience that this is a recipe for mediocrity. Resisting this temptation will more often than not produce superior long term returns.
Investment firm Dimeo Schneider indentified funds that had performed in the top quartile of funds (by investment category) for 10 years. It concluded that nearly 85% of these top quartile funds (across all categories) delivered investment results below their respective benchmarks for at least one three period. Even the best fund managers that have produced superior long term results can have a few years of underperformance.
That does not mean that you should invest in a vacuum. If a fund is no longer adhering to its stated investment style, and is making large bets in a few industries a change may be in order. But if a manager is sticking to an investment approach that has worked for long periods and is well diversified, in my view, it is better to stay with the fund. You can view virtually any mutual fund’s performance and top holdings at www.morningstar.com.
Research confirms that even the best long-term performing funds can lag over the short term. My advice is to choose your funds carefully, consistent with your target asset allocation, and make changes mindfully.
Have a Happy Holiday Season.
Best Regards,
James Onorato
President
December 16, 2011