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Investor Peer Pressure And The Folly Of Performance Rankings

Building a portfolio based on a top performer list is like buying a car based on the color. Philosophy and strategy matter; risk matters.

I am the patriarch of a swimming family. I started as a kid and love taking my four children to the pool year-round

Recently I took my daughter Audra, age 5, for a dip after work (one-on-one time is priceless). Audra is an outgoing child, managing to make new "friends” wherever we go. This time, however, she ran into one of her classmates, a girl I would define based on observation as an alpha child.

Audra quickly fell in line with her classmate, hanging on her every word and movement, a striking image I had not witnessed in her brief life.

Peer pressure is a powerful force. As much as I have matured from my youth (yes, I did wear acid washed jeans and a choker necklace as a teen), I often try to blend in. It’s human nature to follow the crowd for fear of standing out or being exposed. 

January is the month when markets and investors arbitrarily turn the page, closing the book on a year’s performance; arbitrary since I have yet to find a client with a perfectly symmetrical life cycle. Advisors join in turning the page and business publications rush to publish their lists of top performing securities and mutual funds.

When it comes to fund performance, inevitably, there is little overlap. For example, according to Kipplinger’s Large Company stock fund rankings, only three of the 3-year top performers made the 5-year list.

The pull of such lists, like an alpha girl in the pool, is strong. Who wouldn’t want to be associated with a winner? 

I have had clients through the years present me with lists and ask why we weren’t joining the party by investing in a top performer.

Here’s why: Building a portfolio based on a top performer list is like buying a car based on the color. Philosophy and strategy matter; risk matters.  Most top performer lists don’t account for risk, and they certainly don’t account for client circumstances.

New York Yankee legend Yogi Berra says the key to baseball is to “hit em' where they ain't.” The same can be said for value investing, where this year’s winners are often next year’s losers. 

It's the mix that matters. Think of an investment portfolio like an orchestra; all instruments in harmony, with the sound (performance) as the sum of the individual parts.

Do you pay attention to performance rankings? I would enjoy hearing from you at 630-545-3653 or wlg@trustcoil.com.

This post is contributed by a community member. The views expressed in this blog are those of the author and do not necessarily reflect those of Patch Media Corporation. Everyone is welcome to submit a post to Patch. If you'd like to post a blog, go here to get started.

Dr. Sam Weisz January 28, 2013 at 06:22 AM
Thanks for the insight. I always find it amazing how we are drawn to invest based on past performance.
William L. Gaul, CFA, CTFA January 28, 2013 at 03:06 PM
Thanks for reading and taking time to comment. I imagine there are parallels to those who wish to self diagnose in your world.
Dr. Sam Weisz January 28, 2013 at 04:31 PM
Good point. I think I am in the minority but I tend to encourage a little self diagnosis. Difference is unlike self investors we usually don't have people grabbing for the pliers by themselves!:)
William L. Gaul, CFA, CTFA January 28, 2013 at 04:33 PM
touche'

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