Chasing Rabbits...and Mouth-Watering Investments

Chasing Rabbits…and Mouth-Watering Investments

June 20, 2021

Chasing rabbits ... and mouth-watering investments

Chasing Rabbits…and Mouth-Watering Investments

June 20, 2021

Our old neighborhood was rife with rabbits, and Puccini, our hound mix, was always desperate to catch one. Many days, she would see two or three, whether on our walks or in our yard.

The routine was identical. First, she would freeze. Then, ever so slowly, she would take excrutiatingly small steps, trying not to alert her prey. Her mouth would quiver. The rabbit would munch on grass, unfazed. Finally, Puccini would start her dash, the rabbit would bolt and the chase was over. Our adorable hound's success rate in 6 years: 0%.

Chasing Investment Gains

A similar dynamic plays out in investing. But instead of chasing rabbits, investors chase performance. That is, they scan for investments which have recently done well and buy those tasty morsels. It can be mutual funds that have soared, or individual stocks, or types of investments (so-called "asset classes"). Until this year, the hot investments were large tech stocks like Apple, Amazon, Google and Facebook. Now they are cryptocurrencies like Bitcoin, special purpose acquisition companies (SPACs) and non-fungible tokens (NFTs).

Many investors are certain their success rate is high. Perhaps, for some, it is. But the academic research says, on average, it's actually below 0%. That is, on average, investors do worse than if they had simply bought one or several diversified mutual funds and stuck with them. The research also concludes that most investors don't even realize their success rate is sub-zero. As humans, we remember our successes, forget our failures, and don't keep score accurately.

Watching Puccini go after rabbits is entertaining. The same can't be said for watching investors. Chasing returns is usually an expensive mistake. Seeing the rabbit is very different than catching it.


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This article is not intended to provide tax, legal, accounting, financial, or professional advice. Readers should seek advice from qualified professionals who can review their specific circumstances. Old Peak Finance endeavors to provide information that is accurate and current. However, we cannot guarantee that this information has not been outdated or otherwise rendered incorrect by new research, legislation, or other changes. Old Peak Finance has no liability or responsibility to any individual or entity with respect to losses or damages caused or alleged to be caused, directly or indirectly, by the information contained on this website.

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