Why one should not chase short term performance?

There is a tendency among certain investors to keep checking the value of their investments. Has the stock price moved up or down? What was the closing value of the market index today? What was the NAV of the fund? Many feel that they need to be on top of the news so that they can manage their investments better.

They argue: “The investing world is too dynamic. There are so many changes. In such a fast changing world, if you are not on your toes, you may lose out.”

So let us understand how one needs to manage the investments.

Well, investing is more like playing a cricket test match than like playing a T20 match. It is like running a marathon than like running a 100m race. Imagine a batsman constantly looking at the scoreboard while batting and calculating what to do on the next ball. Will this batsman be able to focus on the game at all? What are the chances that he would soon get out? In a test match or in a marathon, you have to build the game in the beginning and settle down. This is crucial. Without such a plan, there is no way one can win the game.

Exactly the same principles apply in case of investing, too. In fact, investing is a much longer term game (if one may call it a game) that a cricket test match or a marathon. The test match gets over in five days and the marathon in a few hours. The game of investing starts when one starts to earn and lasts as long as one lives. Very often, the investments last longer than one’s own generation as the wealth is transferred from one generation to the next.

In the world of investing, the tendency to focus on short term often leads one to transact, even when the same may be unnecessary and at times, even costly. Every transaction may have some cost attached – be it in the form of transaction costs like brokerage or taxes – capital gains tax or even securities transaction tax. Costs and taxes bring down the investment returns.

Every time one takes an action in the form of a transaction, there is a possibility of making a mistake. Research has shown that when you increase the number of decisions and actions, the probability of error tends to go up, especially for the amateur investors.

When one is investing for long term financial goals, the focus must also match the investment horizon. Chasing short term performance leads to higher costs, taxes and risks.

Disclaimer – This document is for general information only and does not have regard to specific investment objectives, financial situation and the particular needs of any specific person who may receive this information. Investments in mutual funds and secondary markets inherently involve risks and recipient should consult their legal, tax and financial advisors before investing.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

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