Chasing Hot Funds? Be Careful...
You Could Get Burned!
With
so much hype surrounding these funds, it's easy to get caught in the
rush of investors scrambling to jump on the bandwagon. But chasing
winners is a risky investment strategy, and one that often puts
participants at the back of the pack.¹
A recent
study by Financial Research Corp. in Boston found that the average
investor consistently undercuts portfolio performance through excessive
turnover — buying "hot" funds right at their peak, only to
get stuck riding out the downturn.² One reason may be that investors
fear missing out on opportunities, so they bounce from one fund to
another, hoping to "make it big" eventually. But the stock
market is notoriously fickle when it comes to picking favorites, and
most funds don't stay in the winner's circle for long.
Sector-specific
funds are particularly vulnerable to the market's unpredictable
fluctuations. Economic concerns, political issues, and even news stories
can temporarily push one industry into the limelight. Invariably,
however, market conditions shift, and these top performers fall out of
favor.
Keeping a
long-term perspective can help investors successfully wade through the
market's characteristic ups and downs. Relying on professional expertise
can also make it easier to resist the temptation to follow the crowd.
Research has shown that individuals who use a financial advisor are more
likely to be disciplined when it comes to sticking with their long-term
investments.³
Investors
who insist on chasing highly touted mutual funds may run a greater risk
of getting burned. Conversely, those who keep well-diversified
portfolios and invest for the long haul may have a better chance of
achieving financial success.
1) There are risks,
fees, and expenses associated with investing in mutual funds, including
portfolio management fees and expenses and sales charges. Mutual funds
are sold by prospectus only. Be sure to read the prospectus carefully
before deciding whether to invest.
2–3) Chicago Tribune, January 8, 2002
©
2003 Emerald Publications
