Have you ever sat in traffic on the motorway and watched someone frantically jumping between lanes as they think they start to see one lane move moderately more than the one they’re in?

More often than not, after multiple lane switches, satisfyingly for you, that driver ends up behind you in the traffic as you quietly smile and judge their impatience.

Just like on the motorway, the “pick and stick” mentality can potentially help your return when selecting investment funds.  I’ll walk you through the simple chart diagram that shows you why.

As an investor, you decide to invest in Fund A and begin to receive the returns associated with that fund. However, after some time you notice that another fund, Fund B, has been giving stronger performance than A.  So, you decide to switch all your investment from Fund A to Fund B, “Switch point”. This is often referred to as “chasing returns” because the returns have already occurred.

After you’ve moved to Fund B, the returns, whilst positive still, aren’t as strong as the prior period and ultimately end up being a little lower than Fund A.

Due to your switch, your path of returns follows the trajectory of Fund A up to the Switch Point and Fund B afterwards.

We can see from the diagram that the final return over the period from the two funds is quite similar but your return as the investor is substantially lower than either Fund A or B.

The lessons from the chart are that it’s easy to see what a return has been, but very hard to predict what it will be into the future.  The best thing you can do as an investor is select a fund that’s suitable for your risk profile and needs from the outset and then stick with it. Don’t be tempted to chase performance when you see other funds giving higher returns as you run the risk of substantially reducing your own returns over time.