How Investors Chase Past Returns

During the recent financial crisis, investors pulled money out of stock funds for five years in a row. Fear kept investors away even as stocks began to recover

Morningstar Analysts 28 November, 2013 | 10:45AM
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All investors probably wish they had known last year which asset class was going to perform well this year. However, no one can anticipate market movements with such certainty. Investors generally tend to choose asset classes based on past performance, as indicated by the fund flows and asset-class performance charts observed side by side. Flows of money into funds tend to follow performance, a clear example of how investors tend to chase past returns.

During the recent financial crisis, investors pulled money out of stock funds for five years in a row. Flows into bond funds, on the contrary, reached a peak in 2009 and remained high in 2010, 2011, and 2012. Fear of the stock-market decline kept investors in flight-for-safety mode even as stocks began to recover. In point of fact, U.S.-stock returns were negative for only one year, 2008. In all the following years, stocks actually posted gains.

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