The Thinking Investor

By Rick Ashburn

Monday, June 02, 2008

Chasing Returns is Destructive Behavior

The number one mistake investors make is the habit of chasing recent winners. People will inexorably move their money to an investment that has done well in the recent past. The grass always seems greener somewhere else, and we are constantly tempted to move across the street.

This phenomenon of chasing returns produces an apparent paradox. Investors do not earn, as a group, the same returns as are reported by the very mutual funds in which they invest and by the market indices. If a market index, such as the S&P 500, produces a given amount of return over some period of time, the entire collection of people that actually invest in the market never earn as high an amount, even after adjusting for fees. How can this be so? I can give you a simple example that explains the paradox.

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posted at 05:44:48 PM | permalink

Tuesday, April 22, 2008

Be Afraid. Be Very Afraid.

The inflation figures for March came out last Wednesday. Yikes. Just when you thought it was safe to retire. I am often surprised at some of the punditry surrounding the release of inflation data. First of all, you should know that we really don't have an accurate feel for the inflation data until at least six months after the fact. The Labor Department releases figures about two weeks after the end of each month, and often revises those figures down the road sometime later.

Nonetheless, I would consider the year-over-year inflation figure of 4.0% to be pretty reliable. The commentary accompanying that figure (from Wall Street, mostly) is largely focused on the fact that most of the 4.0% is attributable to only two categories: food and energy.
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posted at 04:28:33 PM | permalink

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