behaviour
Past Winners Rarely Repeat
The rule
Last year's top fund rarely tops the list again. Chasing the recent winner is buying high after the run, so it is a losing habit.
Where it flips
Taken crudely, this can make you ignore all differences between funds. But lasting edges like low cost, a sensible mandate, and low churn do matter. So choose on the durable traits, cost and structure, not on last year's return chart.
The fund that topped the charts last year is unlikely to top them again. Much of past performance is just luck, and hot streaks cool off. Chasing the recent winner means you keep buying high, after the good run, and dropping it just before it drifts back to average. The one thing that really carries forward is cost. A low yearly fee grows in your favour over time. A star rating from last year does not.
A worked example
Aman switches into a fund because it returned 40% last year, even though it charges 2.1%. Then it drifts back to the pack and trails a plain index fund charging just 0.2%. [illustrative]
How to spot it
- ·ranking funds by last year's return
- ·star ratings quoted, yearly fee ignored
- ·switching in right after a hot streak
William Bernstein · The Four Pillars of Investing