Archive / Investment Adviser (Level 2) / Behavioural Finance in Practice
nism-series-xb-chasing-past-performance-safeguard[ INVESTMENT ADVISER (LEVEL 2) ]
An investor repeatedly shifts money into whichever asset class performed best in the previous year, assuming the trend will continue — a behaviour the NISM workbook compares to 'driving a car by looking in the rear view mirror.' Which safeguard does the workbook recommend against this chasing of past performance?
[ A ]A pre-decided asset allocation policy with upper exposure limits for each asset class, along with a maximum exposure limit within a given asset class for any specific security[ CORRECT ]
[ B ]Opening a separate account with a fixed budget so spending is contained
[ C ]Priming the client in advance with the benefits of patience and long-term investing
[ D ]Educating the client on the benefits and opportunities of investing in global markets
Takeaway
Option A is correct.
Derivation
The NISM workbook likens chasing past performance to 'driving a car by looking in the rear view mirror' and states that 'a pre-decided asset allocation policy that has upper limits for each asset class makes sure that overexposure to a specific asset class is avoided,' with 'a maximum exposure limit within a given asset class' doing the same for a specific security. Each wrong option is a genuine remedy from the same chapter but addresses a different behaviour, retail therapy, action bias, or home country bias, not performance-chasing.
Why the others fail
B — Opening a separate account with a fixed budget so spending is contained
This is the book's remedy for Retail Therapy, stress-driven shopping, not for chasing past performance.
C — Priming the client in advance with the benefits of patience and long-term investing
This is the book's remedy for the action bias behind too-frequent transactions, not specifically for performance-chasing.
D — Educating the client on the benefits and opportunities of investing in global markets
This is the book's antidote for Home Country Bias, not for chasing past performance.