Chasing investment returns refers to the activity of switching from a poorly performing (or average performing) investment into one that has an excellent recent return. There are a few problems with this investment strategy:
- “Hot” investments don’t usually stay hot. In fact they usually come crashing back to earth shortly after you buy them.
- Investments that aren’t doing well can make a comeback. If you sell them at the bottom, you might miss out on any recovery.
There is nothing wrong with buying and selling investments if you have a solid investment plan and make your buys and sells based on that plan. The worst type of investing is to buy investments after they have gone way up in value and then sell them after they have dropped in value. This is also known as “buying on greed” and “selling on fear“.
Stick to your investment plan
If you own investments then you should have some sort of investment plan. It could be as simple as this:
- Determine my asset allocation based on my investment time horizon and risk tolerance.
- Make sure my portfolio matches my desired asset allocation.
- Make regular contributions.
Know the history of your investments
If you want to invest in stocks then make sure you understand the history of the stock markets. If you are aware that the stock market has always recovered from past dips then it makes it easier to not sell your stocks after a big drop. If you know that great stock returns will probably end badly (as in the past) then it makes it easier to avoid being greedy when the stock market is doing well.