Performance chasing is common in investing. Not investing based on momentum strategies per se, but choosing funds, money managers and newsletters based on recent performance. Institutional investors (pensions, endowments, etc.) are as guilty as individual investors when it comes to looking for the hot hand.
Such behavior often leads to worse outcomes than better ones. While some funds and managers should be walked away from—if there is going to be average performance, then there has to be below-average performance too—not all should be fired based on recent performance. Some underperformers should actually be hired (purchased).
Rob Arnott and two of his colleagues at Research Affiliates made the argument for doing so in a paper appropriately titled, “The Folly of Hiring Winners and Firing Losers.” The authors looked at over 3,300 funds. They found that, in certain instances, chasing worse aggregate performance can be a profitable strategy. The key is to seek funds whose style is out of favor, thereby causing them to hold undervalued assets. Likewise, leave funds whose styles have been very much in favor, thereby causing them to hold overvalued assets. It is a buy low, sell high approach.
AAII Members Receive Tax Guidance
The March AAII Journal features an update to our popular tax guide. The update covers the new Tax Cuts and Jobs Act, explaining what has changed and what hasn’t changed.
The update will help you understand how your tax situation may differ this year from last year and what you can do to potentially lower your tax bill.
Start your AAII membership today to get both the new Tax Guide Update and The Individual Investor’s Guide to Personal Tax Planning 2017, as well as to benefit from everything AAII has to offer.
More on AAII.com
- The Truth About Top-Performing Mutual Fund Managers – Top-performing mutual funds underperform their benchmarks at some point, but investors are usually rewarded for sticking with them.
- How to Measure the Skills of Your Fund Manager – The statistical measure R-squared, included in our Mutual Fund Guide, can reveal whether a fund manager is truly following a differentiated strategy.
Highlights from this month’s AAII Journal
- Retirement Planning Strategies Following the 2017 Tax Act – The lower tax rates and higher standard deductions make taking advantage of Roth IRAs more attractive now.
- “Sell in May” Has Weakened as a Strategy – The relative underperformance of stocks starting in May has become less severe because the so-called January effect has weakened.
AAII Sentiment Survey
Pessimism has jumped by a cumulative 14.0 percentage points over the last two weeks and is now at its highest level since last September. More about this week’s results.
This week’s results:
- Bullish: 31.9%, down 1.3 points
- Neutral: 32.7%, down 5.5 points
- Bearish: 35.3%, up 6.8 points
- Bullish: 38.5%
- Neutral: 31.0%
- Bearish: 30.5%
View the Sentiment Survey.
What’s Trending on AAII
The Week Ahead
As a reminder, the U.S. stock exchanges will be closed tomorrow in observance of Good Friday. Our office will be closed as well. On behalf of everyone at AAII, I wish a happy Easter to those of you observing the holiday. For those of you observing Passover, I wish you a happy Pesach as well as luck in finding the afikoman.
The week’s first economic reports will be the March Purchasing Managers’ Manufacturing Index (PMI), the Institute for Supply Management’s (ISM) March manufacturing index and February construction spending, released on Monday. Tuesday will feature March motor vehicle sales. The March ADP employment report, February factory orders and the ISM’s March non-manufacturing index will be released on Wednesday. February international trade will be released on Thursday. March jobs data—including the change in nonfarm payrolls and the unemployment rate—will be released on Friday.
Two Federal Reserve officials will make public appearances: Minneapolis president Neel Kashkari on Monday and Tuesday, and Cleveland president Loretta Mester on Wednesday.
Local Chapter Meetings
AAII Local Chapter Meetings offer you a variety of presentations from expert speakers who will give you their view on the world of investing. A bonus of attending a Chapter Meeting near you is the opportunity to meet other AAII members who share your interest and enthusiasm for investing. You can even share the Chapter experience with your family and friends by inviting them to attend Chapter Meetings with you!