A New Year, A New Fund?

The turn of the calendar often comes with reviewing our accomplishments (and shortfalls) of the previous year. This is especially true with investing. How did our portfolio do? Should I make changes for the coming year? In talking with friends and prospective clients, it is a common practice for some investors to look back at last year's winners when considering changes to one's portfolio. 

People seek patterns in areas that are complex and where we have possess limited expertise - like investing! Buying last year's top performing funds is a great example. We think such a strategy is likely to be counterproductive. We prefer to rebalance portfolios at the asset class level - reducing funds that did well over the past 12 months and increasing allocations to "cheaper" asset classes, i.e. those that did poorly in the recent past. As this post from Ben Carlson points out, there are myriad reasons why looking to last year's winning funds as replacements for your portfolio may do more harm than good.