What is the risk of investing in top-performing mutual funds? And why is recently great performance usually followed by poor performance? Investing in top-performing mutual funds comes with several risks, and recent strong performance is often followed by weaker results due to well-documented market phenomena. Risks of Investing in Top-Performing Mutual Funds Mean Reversion: Mutual fund performance tends to revert to the mean over time. Funds that outperform their peers are likely to see their excess returns diminish as the factors or luck that drove their success fade. This means that investing in funds after a period of strong performance may expose you to disappointment as returns normalize. Herding and Overcrowding: When a fund achieves top performance, it often attracts large inflows from new investors. These inflows can force the fund to buy more of the same assets, potentially driving up prices and reduci...
Why investors should ignore all media commercials about how to pick hot stocks Investors should ignore media commercials about how to pick hot stocks for several well-supported reasons: Advertising Influences Short-Term Attention, Not Long-Term Value Media commercials and advertising campaigns can attract investor attention and temporarily boost a stock’s price, especially among retail investors. Research shows this effect is usually short-lived, and stocks with increased advertising often underperform in the following years as the initial hype fades. This pattern is especially strong for companies with less analyst coverage and more retail ownership. Commercials Often Promote Speculative or Unproven Strategies Stock picking commercials frequently promise extraordinary returns or “secret” systems, but these claims are not backed by credible evidence. The track record of stock picking—whether by individuals or ...