Investors cite many reasons for favoring a particular class of investment, but the most common is simply, "It has done so well." The unspoken assumption is that it will continue to do well. Investors aren't alone in this line of reasoning. The media, too, tends to focus on recent price trends to extrapolate future performance.
In the past few years, small-cap and foreign stocks (especially emerging markets) have performed very well, drawing the media's attention and the public's money. Money flows into mutual funds show that people are investing heavily in small caps and emerging securities; recent flows into foreign and international funds have outpaced flows into domestic funds.
We think extrapolating price trends into the future is likely to lead to poor investment results. Investing in a market sector simply because "it's done so well" is like choosing to plant corn in October because your neighbor's corn has grown so well since April.
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In the past few years, small-cap and foreign stocks (especially emerging markets) have performed very well, drawing the media's attention and the public's money. Money flows into mutual funds show that people are investing heavily in small caps and emerging securities; recent flows into foreign and international funds have outpaced flows into domestic funds.
We think extrapolating price trends into the future is likely to lead to poor investment results. Investing in a market sector simply because "it's done so well" is like choosing to plant corn in October because your neighbor's corn has grown so well since April.
Read the complete article
