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Investment Returns Pitfalls

Do not let your desires obscure your rational thinking when the time for deciding in which fund to invest your money comes. Chasing returns is not always the best practice you can undertake. This means that you should not rest your decision only on performance indexes from a previous year.

Chasing performance often includes the switching of funds or the purchase of new ones, changing newsletters, or transferring to another investment advisor. Whatever the action, the investors' main intention is to put their money in what is considered "hot" and with high potential returns. Nevertheless, far too often such an action leads to very disappointing results.

In order to get a clear grasp of the grey consequences that may follow after chasing investment returns, consider the following example:

Mr. Smith was planning where to invest his money and after checking the performance of several top performing funds, he selects the ones with the highest performance percentage for 2000. He selected such funds as MAS Small Cap Growth, which has grown 313.9% in 1999. Mesmerized by the high returns that these funds experienced, Mr. Smith hoped that even a small fraction of these high returns will be enough for him to get retired earlier.

Unfortunately, in today's dynamic business environment, every year presents unique opportunities and it is hardly likely that one and the same year may repeat itself. MAS Small Cap Growth dropped by 23.1% as did the other four funds.  It would have been easy for Mr. Smith to ignore these losses if only he had enjoyed the high returns in 1999. But he has come to the show too late!

Always remember that what has been "hot" one year may "cool down" the next. This does not mean that you should invest in what is out of favor, but just to try not to let your rational thinking be obscured by the greed of obtaining a portion of what was in the past years. Remember, every year presents different returns and it is up to your common sense to assess the past and future opportunities and invest in what is reasonably profitable not "hot"! 

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