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  • Writer's pictureKevin Ridgway, CFP

The Danger of FOMO: Why Chasing Recent Returns Can Harm Your Investment Portfolio

A great chart by Dimensional Fund Advisors highlights the problem with chasing the biggest stocks.

The chart below shows that many fast-growing stocks have stopped outperforming after becoming one of the 10 largest stocks in the US. On average, companies that outperformed the market on the way up failed to outperform in the years after making the Top 10 list.

Past performance is no guarantee of future results. This information is intended for educational purposes and should not be considered a recommendation to buy or sell a particular security.

Every year the market highlights a standout trend, be it the Bitcoin craze, artificial intelligence, or as seen lately, Nvidia.

Investors often respond to short-term gains in the market by flocking to the latest 'hot' investments, assuming these gains will continue. However, this approach is typically a long-term losing strategy and is a frequent error among individual investors.

Final Thoughts

  • Headline Influence: Overconcentration in popular stocks can lead to underperformance compared to a globally diversified portfolio.

  • Performance Chasing: Selecting funds based on past performance is unreliable, as most top-ranked funds do not maintain their status over time.

  • Advisor Benefits: Working with a financial advisor can help avoid common investing mistakes and develop a disciplined, diversified investment strategy.

  • Investment Strategy: Investors are warned against expecting continued outperformance from top performing stocks and are advised to maintain broad diversification in their portfolios to capture returns from future top-performing companies. Risks include loss of principal and fluctuating value. Investment value will fluctuate, and shares, when redeemed, may be worth more or less than their original cost. Diversification does not eliminate the risk of market loss.

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