Financial advisors who constantly check the short-term performance of portfolios should not assume those efforts will lead to better investment decisions, according to a new report from Research Affiliates.
On the contrary, obsessing about a portfolio’s short-term performance can easily lead to chasing performance, buying recent winners and selling recent losers just before the tide is about to turn, writes Jonathan Treussard, author of the report and leader of the firm’s Product Management Group.
“Costly mistakes arise when we react to short-term performance assessments,” writes Treussard.
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He’s not suggesting that advisors refrain from measuring short-term portfolio performance, but that they do so “within a framework that acknowledges short-term noise and encourages investors to stay the course” and “develop investment beliefs informed by, but not solely derived from, data.”