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What to do after a strong or weak market year: don't chase performance
Key takeaways
- Performance chasing (buying what just rose) is one of the best-documented investing mistakes.
- Past performance of a sector or fund does not predict future performance — research confirms this repeatedly.
- After a strong year, the winning sector's weight in a portfolio naturally drifts higher — that is the right moment for rebalancing.
- Discipline and consistency deliver better results than market timing or rotating between winners.
- When unsure what to do, the best answer is most often to do nothing — just continue investing regularly.
After a strong market year, everyone wants to add to whatever drove performance. After a weak year, everyone considers switching elsewhere. Both paths almost certainly lead to below-average results.
Why chasing performance doesn't work
The mechanism is simple: the best-performing funds and sectors of the year attract new money that pushes prices higher — precisely when they are most expensively valued. An investor entering after a year of strong performance is buying expensive. And the sector that led in a given year can collapse in an entirely different way the following year.
Behavioural finance research repeatedly confirms it: the average investor in actively managed funds achieves significantly lower returns than the fund itself — because they enter and exit at the wrong time.
What to do instead
- Rebalancing: if equities have risen strongly, their weight in the portfolio exceeds the target — sell part back to target and buy what has underperformed. That means selling expensive and buying cheap.
- Continue regular contributions: a DCA strategy automatically buys more at lower prices and less at higher ones.
- Don't copy performance rankings: the "best funds of the year" overview is tempting but practically useless.
Psychology and practical rules
The emotions after a strong year are understandable — but that is precisely when it is important to have a plan and stick to it. Investment decisions should be based on changes in your own situation (income, horizon, goals), not on market performance over the past twelve months. More on building a resilient portfolio in the article how to build your first portfolio.
FAQ
What is performance chasing in investing?
Buying what has risen the most in the recent period — the best fund, sector or stock of the year. The problem is that these assets are then most expensively priced and tend to revert toward average returns in the next period.
When is the right time to rebalance a portfolio?
After a significant market move that has pushed portfolio weights away from target allocations. Or regularly once a year, regardless of performance. Rebalancing is a disciplined way to sell expensive and buy cheap.
What to do when unsure what to do with a portfolio?
Most often the best answer is to do nothing — continue regular investing and not react to short-term performance. Active changes to a portfolio typically cost money and time, not the other way around.