Why it doesn’t pay to chase fund performance

One of the most important investment decisions you make is in determining your asset allocation, or how you choose to divide your assets between risky and safe investments. Another key decision concerns which strategy to use when selecting the funds to implement your asset allocation plan. Should you be a buy-and-hold investor? Or should you rely on recent performance to select funds?

Vanguard’s research team examined exactly this question in a July 2014 study, “Quantifying the Impact of Chasing Fund Performance.”

Vanguard notes that chasing performance isn’t limited to individuals. Most institutional investors do so as well. Unfortunately, studies on pension plan sponsors have found that the managers who were fired actually go on to outperform their replacements. Yet, despite this and other evidence demonstrating the lack of persistence in outperformance beyond the randomly expected, chasing prior returns must have a strong allure because investors keep doing it.

Read the rest of the article on CBS News.