Danger of popular mutual funds
When you are looking for a new investment fund, it is only normal to look at the most popular investment funds . Such as tech stocks or new gadgets or the latest social media hype. But that is not always the best way to find a good investment. A hype does not mean a good stock market performance and past returns do not guarantee good performance in the future.
Historical returns
When looking for an investment fund, there are a number of funds that are always recommended and praised for their past returns. It seems logical to choose these funds, but it is not without reason that this is a well-known mistake when it comes to investing. A fund with good returns in the past attracts many new investors, but the return can still be disappointing in the coming years. Why do these funds with historically excellent returns still lose in the future? There are several reasons, but you can imagine that strategies are sensitive to trends and you cannot continue to use the same strategy.
Future returns
In 2014, one of the largest asset managers, the American Vanguard Group, conducted a study on the predictive value of historical returns. They compared two strategies involving buying mutual funds. The first strategy was a so-called buy-and-hold strategy: one where people bought average performing funds and held them for a long time. The second was a performance-chasing strategy: people bought mutual funds every year, specifically funds that had achieved the highest return in the past 3 years. The study showed that the first strategy, the buy-and-hold strategy, resulted in 50% more profit per year.
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