Chasing last year's best fund is a reliable way to lag

Everything below about performance chasing comes from what actually happens rather than from what is supposed to.

Persistence is weak

Studies tracking top-quartile funds into subsequent periods consistently find limited persistence. Some of what looks like skill is sector or style exposure that happened to be in favour. When that style falls out of favour, the same fund appears in the bottom quartile.

Buying high by construction

A fund appears at the top of a table after it has already performed, which means you buy after the gain. If the driver was a style cycle, you are buying near the point of maximum enthusiasm. This is the mechanism behind the behaviour gap rather than bad luck.

Switching has direct costs

Dealing costs, spreads, time out of the market during a transfer and potential tax in a taxable account all apply. Frequent switching accumulates these without any compensating advantage.

Each switch also restarts the psychological clock, making the next disappointment arrive sooner.

What would justify a change

A change in the fund's mandate, a substantial rise in charges, a change in the index tracked, or the fund no longer fitting your plan. Underperformance against a peer over a short period is not on that list. Writing the criteria down in advance prevents post-hoc justification.

Boredom is the actual enemy

A well-constructed portfolio is uneventful, and uneventful feels like inattention. The urge to act is strongest when nothing needs doing. Directing that energy at contribution rate rather than holdings is where it produces a return.

The takeaway

Write your sell criteria in advance. Nothing on that list will be "it had a bad year".

The version you keep doing is the version that works.