Jason Zweig, in an interview with Morningstar, points out that performance chasing is seen in all parts of the investment world:
There was a beautiful study that was published in the The Journal of Finance a couple of years ago about the selection of institutional money managers. It basically found that the professionals who pick money managers, in this case it was pension funds, tend to buy high and fire low. They invest in whichever managers have the best trailing three-year performance and then sell whichever have the worst trailing three-year performance. The study showed that if they had flipped their decisions-if they had bought the ones with the worst three-year performance and sold the ones with the best-they actually would have gotten better returns. And of course if they had done nothing-if they had just put the portfolio on ice-they also would have done better. Performance-chasing, despite all the propaganda you hear in the financial industry, is not purely the province of retail investors. It’s not the so-called “dumb money” on Main Street that buys high and sells low. Everyone does it.
You have three choices: you can go with a manager when they are hot, you can go with a manager when they are cold, or you can do nothing. Investors, in aggregate, make the worst choice of the three! If you don’t have the emotional resilience to go against the grain, at least have the patience to sit on your hands.
[...] Hiring and firing money managers is a tricky business. Institutions do it poorly (see background post here ), and retail investors do it horribly (see article on DALBAR ). Why is it so [...]