The Risk In Chasing Performance

One of the blogs I read on a regular basis is Ben Carlson's A Wealth of Common Sense. Ben's articles are written with a style that employs one of Albert Einstein's quotes, "If you can’t explain it to a six year old, you don’t understand it yourself." His latest article, Avoiding Process Drift, focuses on the vagaries of performance amongst the different investment styles, i.e., large growth, large value, small growth, etc. He notes in the opening paragraph of the article that investors are beginning to question the underperformance or outperformance of the varies investment approaches. Is it time to make a change in one's style allocation? He writes,

"Growth and momentum stocks are on fire this year, crushing their value counterparts, so of course investors are trying to figure out what it all means. The problem with looking at just the latest performance figures is that there’s no context involved. This type of thinking is how investors make mistakes."

Based on the below chart that shows performance as of the end of July, which style does one choose now?

From The Blog of HORAN Capital Advisors

Source: A Wealth of Common Sense (click to enlarge)

Ben Carlson's article concludes that chasing a recent performance winning strategy has often been a losing strategy. His article contains performance figures noting the underperformance of "performance chasing" strategies.

The important factor for investors is to stick with a process as noted by Ben. Certainly, if ones process is not working over the longer run, i.e., more than just the seven months that have passed this year, adjusting one's approach would be appropriate. Reading Ben's entire article is a worthwhile read.