Thursday, October 21, 2010

Dump-and-chase – works in hockey (sometimes) but not in investing

If you’re a hockey fan, you know all about the dump-and-chase strategy. That’s when the offensive team gives up possession of the puck by shooting (or ‘dumping’) it into the attacking zone and then swarms after it to regain possession and set up a scoring chance.

In these difficult economic days, too many investors are pursuing a similar strategy with their investments. It’s not a good strategy, especially for long term success – here’s why.

  • When markets are volatile, it is very difficult to predict when a stock will go up or down. That is causing panicky investors to quickly dump underperforming equity investments (a stock or equity mutual fund) and go chasing after others that ‘look like’ they might go up. But ask any expert and they will tell you that quick selling to buy ‘the next big thing’ is almost impossible in practice.
  • There is no doubt that risk is a fact of life when it comes to financial markets. But there are different kinds of risk and one of the biggest is jumping into and out of the market instead of staying invested. That is a costly strategy because market upturns can be very sudden and a ‘dump-and-chaser’ can easily miss them.
  • The inescapable fact is: it simply doesn’t pay to chase performance. The keys are to stay invested for the long term and effectively manage risk by carefully selecting investments and employing an effective asset allocation and diversification strategy that takes full advantage of opportunities in any market.
There’s no single diversification formula that works for everyone – it depends on your goals, financial situation, the amount of time you have to invest and most importantly, your personal tolerance for risk. Your professional advisor can examine your portfolio structure and performance and help you put together a diversified portfolio that offers a comfortable blend of risk and return. No dumping-and-chasing required.

No comments:

Post a Comment