Chasing performance can be deadly!

US stocks have outperformed other investments to such a degree that investors may be tempted to jettison, a well-balanced portfolio in order to chase what seems to be the only game in town. Through the end of October, US equities, especially smaller company stocks, have vastly outperformed other investment classes.

The temptation to drop the bonds and other lower performing investments in order to add to US stocks will be hard to resist. Many investors will review their accounts more thoroughly in January, and they likely will notice not only that the one year returns on US stocks was very good (as measured by the S&P 500), but that the five year track record has improved tremendously (thanks to 2008 dropping off). Then, they will see that for the first time in recent memory they probably lost money in their bonds.

However, I would caution investors... Chasing performance usually ends up being disastrous since investments have cycles. We often sell an investment right as it gets ready to outperform, and we buy one just as it reverts to the mean. More dangerous still is the investor who goes from a conservative stance to an aggressive one just to chase performance.

Chasing performance usually ends up being disastrous since investments have cycles. [Tweet This]

My thoughts? Decide how much you want in each of the broad asset classes (stocks, bonds, cash, for example). Then diversify within each class. Then rebalance regularly. The ride may not be as exciting, but it will also likely not be as heart-dropping. Let the kids ride the rollercoasters; let you and your money do the lazy river that has a better chance of getting you to your goals.