Chasing Hot Stocks

By Myra O’Dell

Chasing “hot stocks” is a dead end game. It’s human nature to want to jump head first into an investment that is at the top of its game. We tend to approach investing like it’s a sport, betting on the team that has the hot hand going into the play offs. Unfortunately, studious investing goes against our natural instinct to pick current winners.

There have been countless studies that show past performance does not guarantee future results. In fact, those words are often found on investment documents as a disclaimer in small print. You can find numerous studies on the web proving this fact, but I decided to conduct my own experiment. I searched for the top 10 performing large cap blend mutual funds in 2009 and 2013 and compared them. This first chart shows the top 10 mutual funds based in 2009.
chart 1
Notice that while these 10 funds were outstanding in 2009, only half of them even beat the index (S&P 500) in 2013. Now, let’s look at the top 10 funds in 2013.
chart 2
Only two of the top 10 funds (highlighted in red) from 2009 were still in the top 10 in 2013. In fact, some of the top 10 funds for 2013 underperformed the top funds in 2009 by more than half. So what does this mean for investors? It means there is more to investing than picking the hot stocks and sometimes you might have to tune out the media or your buddy giving you the stock tips. In my opinion, it also means buying a diversified portfolio of mutual funds or exchange traded funds with low expenses that track various asset classes. Finally, it means creating an investment plan and sticking with it even when it is tempting to jump head first into the next hot investment.

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