I received an e-mail from my employer’s HR department this week announcing some changes to our 401(k) plan. Here’s what they said (emphasis added by me, fund names masked).
The 401(k) Committee decided to remove the ABC Fund from the Plan due to poor performance for several quarters. The committee closely monitors all funds in the plan for the best interest of our plan participants. ABC Fund will be replaced by XYZ Fund. XYZ Fund’s 10-year performance is in the top 10% of its Morningstar category through 12/31/2006.
Wow, the 401(k) Committee is tough and impatient. ABC Fund’s managers had several quarters of poor relative performance and they were fired by the committee! What happened to investing for the long term?
The committee replaced it with XYZ Fund, which had great performance in the last 10 years. Why didn’t the committee choose the XYZ Fund 10 years ago? I’m sure when the committee chose ABC Fund, ABC also had great performance at that time. It didn’t turn out well. Now the committee jumps over to XYZ. Who’s to say it won’t perform poorly for several quarters and get axed again?
This is called driving by the rear view mirror, or performance chasing. The 401(k) committee, with good intentions, picks funds that had good returns. What they really ought to do is picking funds that will have good returns, because what happened in the past does not benefit anybody who didn’t invest in those funds. It’s what happens in the future that counts. Of course the committee is going to say that they can’t predict the future. Then why bother chasing past performance?
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