The Financial Faux Pas Investors Are Making

Jacqui Kenyon
Posted

performance chasingWhen it comes to investing in stocks, traditional wisdom says “buy low, sell high.”

That way, you’re buying when they’re most affordable and selling when you’re most likely to make a good profit. Makes sense … right?

Why, then, are American investors doing the exact opposite?

Right now, with the S&P 500 skyrocketing 150% from its lows and corporate profits reaching a record high, investors want in. According to Bloomberg Businessweek, equity funds (which invest primarily in stocks) raked in a record $26 billion in the week ending September 18. That record coincided with the stock market’s record high—a result of the Fed’s decision to leave the quantitative easing stimulus program as-is.

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American investors may be practicing what’s known as “performance chasing,” an investing no-no in which you buy hot stocks that have done very well in the past—or currently—in the hopes that they will continue to appreciate in value. The issue with this is that past or recent performance in the stock market usually isn’t a reliable indicator of future trends. In other words, just because a stock has been on the up doesn’t mean that it will continue to rise.

If we’re going to take investing clues from anyone, it may as well be revered investor Warren Buffett, who isn’t jumping to snap up more stock while the market is up—last week, he told Bloomberg, “We’re having a hard time finding things to buy.”

Apparently, he’s the only one.