As you invest over the course of your lifetime, you will feel inclined to search for the best investment. Since we don’t know what the future holds, our natural habit is to look at past performance, with hopes that good performance will continue for years to come.
This happens in other areas of life too. If you are looking to hire a new employee, you want someone with a good track record. However, just because someone was good in the past doesn’t mean they they will be good for your company. The same goes for investments.
Just because an investment performed well in the past doesn’t mean it will continue now, just because you own it.
“Past performance is not indicative of future results” as the saying goes.
Successful investing comes down to a few main principles - maintaining full diversification, keeping costs low, rebalancing to your target allocation on a regular basis, and monitoring tax consequences.
With investing, you want to pretend you are planting seeds that will grow into a large tree that will live for hundreds of years.
I do acknowledge that this goes against human nature. We want to work hard for something, we want instant success, and we want to brag to our friends about how great we are at investing.
There are countless research studies that show actively managed mutual funds that strive to beat their benchmark underperform over the long-term. By simply buying and holding a low-cost index fund, investors can receive their market returns and outperform those trying to beat the market after costs and taxes are factored in.
Do I have a list of 10 hot funds for you to invest in today to outperform your peers? No, and I never will.
If you just continue to water the seeds of your tree, you will be able to enjoy the fruits of your labor for years and years to come.