Behavioral Investing Mistakes: Chasing Trends

Arguably the strongest trading bias, chasing trends is the natural tendency to invest in what did well yesterday. There have been a variety of study's on this topic. One study found that 39% of all new money committed to mutual funds went into the 10% of funds with the best performance the prior year. Humans are great at detecting patterns, unfortunately, I have not seen much evidence that supports the idea that buying stocks that were up yesterday will be up more tomorrow.

Additionally, there are billions of dollars being managed based on sophisticated trend based trading systems. These entities employ Phd's and have massive computing resources. Any trend that does exist will likely be identified and exploited by computers well in advance of any humans ability to act.

Even then, these trading systems don't always work as patterns in markets get priced in so quickly and are often far more random than our natural behavior tendencies would lead us to believe.

While the last few months may feel like an exception, over time, following the herd will rarely produce large sustainable gains over time. Investors should be aware of behavior biases and seek to avoid acting on them. The easiest way to do that is to create an investment plan and stick with it.


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