Mar 1, 2023

The rush to get into the best-performing asset isn't a good idea because it's impossible to get it right over a longer time frame. 01 Mar 2023, 9:20 AM IST 01 Mar 2023, 9:20 AM IST WhatsApp ADVERTISEMENT Investors often end up chasing returns from the various investments that they make. Sometimes it is deliberate as they do not want to be left behind due to the Fear Of Missing Out, or FOMO, but on occasions this can also be done unknowingly, where their actions actually end up with the same result. The rush or the desire to get into the best performing asset or investment is not a very good idea because it is dependent more on timing... Investors often end up chasing returns from the various investments that they make. Sometimes it is deliberate as they do not want to be left behind due to the Fear Of Missing Out, or FOMO, but on occasions this can also be done unknowingly, where their actions actually end up with the same result. The rush or the desire to get into the best performing asset or investment is not a very good idea because it is dependent more on timing and luck and it is impossible to get it right over a longer time frame. This could result in a situation where the expected gains never materialize and the investor ends up being frustrated. What Is Meant By Chasing Returns? The process of chasing returns, in simple words, is nothing but a condition where the investor looks at the immediate past returns that various investments have generated. The best performing asset classes, or even individual instruments within an investment option, are then selected and their money is invested into it. The expectation of the whole process is that the past returns from the investment will continue and that they would be able to benefit from this continued rise. In reality, the situation can turn on its head and the investor could end up being disappointed with the results because of several factors. The Past Does Not Always Continue While it is true that several investments will have done well in the past or even in the immediate past, there is no guarantee that they will continue to do well. There are multiple examples of this across various investment cycles. Take the case of mid-cap companies or small-cap companies and mutual funds investing in these companies. These entities do quite well in spurts and when they perform, they end up at the top of the return charts. This could be present for a year or two, but the reality is also that when the downturn occurs the fall here is also sharp. The mutual funds in these categories, too, behave the same way since their holdings consists of these very companies, and for an investor, this could be a long and frustrating wait. The key point in the entire process is that the potential of the future return is important and not the past returns, especially the immediate past as they can paint a completely different picture from reality. Market Conditions Change In any asset class, there is also a possibility that market conditions change. This will directly affect the outlook of the investments and it can lead to a period of weak performance. This is usually not accounted for by investors and any such happening can completely change the expectations from the investment. If this happens, the recovery can sometimes also take a long time to come about. Right Choice Is Important The choice of the instrument has to be made with the approach that should be right for a particular individual. This is the first step in not getting sucked into the fear of missing out panic. Once there is clarity on the fact that there is something that is right for me, then this will make the job easier because the investor will not feel the need to constantly shift their investment to an area where they feel that they will get a higher return. Just the return is not the factor that should influence the choice of an investment. Constant Success Is Not Possible No matter where you look, be it the performance of a sports personality or a fund manager, it is not possible for someone to remain the best at all times. Similarly, there is no way that an investor will get the timing of an investment right consistently, as there could be a decline or a change in the fortunes of the investment once it has been bought. However, this should not worry the investor too much because they can remain invested and wait for things to improve. Understanding the time period of the entire cycle is important as this will impact performance. For example, gold as an asset class has a longer time period for both the upward and downward phase in its cycle. The stage of the cycle is also a factor that will influence the change in the trend. Overall, it is better to get a steady and consistent performance rather than search for the highest return. Arnav Pandya is the founder of Moneyeduschool. The views expressed here are those of the author, and do not necessarily represent the views of BQ Prime or its editorial team. ADVERTISEMENT