Money: Chasing a winner after the horse has bolted

By MARK FRYER

In theory, choosing where to invest ought to be a thoroughly rational process.

And, still in theory, choosing to invest in overseas sharemarkets makes sense because it is a way of diversifying - into other countries and into industries that don't exist here - and because historically those markets have produced attractive returns.

But back in the real world, many of us have a much simpler reason for investing in overseas shares - because they've been going up.

And then we have an equally simple reason to stop investing in overseas shares - because they've been going down.

This may make as much sense as trying to scoop the Lotto pool by copying last Saturday's winning numbers, but nevertheless it's how many investors behave.

Take a look at the graph at left, based on figures assembled for the Herald by FundSource Research.

It shows the amount of money flowing into, or out of, managed funds which invest overseas - both diversified international funds and those investing in a specific region or country - and how that relates to the performance of overseas sharemarkets.

There is a distinct relationship between the two lines; when overseas markets have been performing well, investors tend to put in more money, but when they have been performing poorly the inflow dries up, or even becomes an outflow.

That's especially noticeable in the past two years or so, as the generally strong performance of overseas sharemarkets was followed by an influx of new money from investors.

Then, after the markets plunged, that inflow dried up.

A rational way to invest? Not a bit. There's one big flaw in this plan - the performance you're chasing has already happened. It's gone. You can't have it.

The latest peak in the graph's performance line was in September 1999 - in the three months to that date world sharemarkets rose at a rate equivalent to 29.9 per cent a year. But the inflow of new money peaked a year later, by which time overseas markets were falling fast.

"People are trying to invest for tomorrow by looking in their rear-vision mirror and that's not proven to be a particularly successful way to invest," says FundSource chairman David van Schaardenburg.

Normally, he points out, when most of us go shopping we buy more of something if that something is cheap, and less if it is expensive. But with investment we tend to get things back to front.

"It's something I don't fully understand as to why people behave, in respect to investing, in a completely opposite way to the way they'd make normal monetary decisions."