Fix It Friday - The S&P 500, Performance Chasing and the Dangers of Outcome Bias
Welcome to Fix It Fridays on the Crazy Wealthy Podcast with Jonathan Blau, CEO of Fusion Family Wealth. In these quick episodes, Jonathan unpacks common financial missteps and the behavioral biases that often trip up even the savviest investors. Today's episode dives deep into the dangers of “Performance Chasing.” He'll explore the importance of proper diversification beyond simply owning multiple funds with similar holdings and discuss overcoming biases like confirmation and recency bias to make informed investment decisions.
IN THIS EPISODE:
- [1:15] Jonathan defines “Performance Chasing” and provides examples of why investors do it
- [5:06] Example of Performance Chasing documented by Morningstar and becoming a wealth destroyer
- [7:44] The importance of staying diversified
- [12:10] Good advice for investors on the long-term perspective
- [12:54] Jonathan gives an example of “DINO diversification” and “true diversification”
KEY TAKEAWAYS:
- Investing heavily in assets that have recently performed well can be risky. This "performance chasing" can lead to concentrated portfolios and significant losses when those assets decline. History provides numerous examples, such as the dot-com bubble, where investors suffered losses by heavily concentrating their investments on a few high-flying stocks.
- Diversification is essential for long-term investment success. However, avoiding "DINO" (Diversification In Name Only) portfolios is crucial, where multiple funds hold significant exposure to the same assets. Proper diversification requires investing across various asset classes, sectors, and investment styles.
- Successful investing emphasizes long-term goals and avoids short-term speculation. The power of compounding demonstrates the importance of consistent investing in a diversified portfolio over the long term. Making investment decisions based solely on short-term market trends and recent performance can harm long-term financial success.
RESOURCE LINKS
Fusion Family Wealth - Website
ABOUT THE HOST:
Jonathan is the President and CEO of Fusion Family Wealth, a firm he founded in 2013 that emphasizes behavioral finance to help clients make rational financial decisions in uncertain times. Known for his clear and engaging approach, Jonathan is a sought-after speaker in wealth management and investing. His background includes senior roles in tax and estate planning at Arthur Andersen, and he holds a BS in Finance, an MS in Taxation, and an MBA in Accounting. Based on Long Island with his family, Jonathan is active in the local business community and supports causes like the Middle Market Alliance and Sunrise Day Camp. He enjoys boating in his spare time.
Fusion Family Wealth, Performance Chasing, Diversification, Long-Term Perspective, Investing, Risk Management, Asset Allocation, Portfolio Management, Behavioral Finance, Compounding, Market Volatility, Financial Planning, Investment Strategy