There is a famous scene in the late 1980s movie When Harry met Sally where a restaurant patron points to Meg Ryan and says: "I'll have what she's having."
If one had to ask the average investment adviser what most clients want, the answer would probably be that they want what they didn't get last year. This phenomenon is confirmed by the money that flows into the previous year's top-performing funds.
A look at the unit trust inflows shows a rush into small caps in 1998, into tech funds in 1999/2000, and into offshore funds early in 2001. All three ended in tears for investors.
Let's examine what goes through our minds when we hear that funds we did not own have performed well. First, our friends who did own them make sure we know about it. (The paper money made in information technology was a popular dinner party topic.)
Next, it's all over the newspapers and the ranking tables of the unit trusts. Finally, we can take it no more, and prompted further by brag advertising (with the caution that past performance does not guarantee future returns in fine print), we give in and buy some.
Suddenly, we no longer feel left out. We breathe a sigh of relief that we can at least nod when others brag about doubling their money, even though we haven't actually made any money on the investment so far. And for a while, the funds normally go up, lulling us further into a false sense of security.
One can hardly call this thinking a solid basis for an investment decision, yet it is very common for people to fall into this trap.
Before you discard all high-performing funds, remember that we are not talking about good returns, but about super returns - over 40 percent, or even doubling in value in one year.
It is possible for fund managers to repeat good performance, but where a sector of funds has experienced extraordinary returns, the likelihood of this recurring consistently over the next few years is very low.
It can happen, but the chances of it decrease with each year of abnormal returns.
Super returns are more likely to recur in a single share or fund manager than in a sector of funds. We will explore this at a later date. Also, momentum plays a role. The longer a group of funds have been out of favour, the more likely that the initial year of good performance may be repeated, due to factors such as the sector initially being undervalued, renewed investor interest leading to flows into the sector and the subsequent buying by fund managers. This pushes up demand and therefore the prices of the investments in that area of the market. This is known as rotation.
There are always well-publicised exceptions to all of these observations, but they tend to be just that.
So what should you do when the dinner table conversation turns to a bragfest? Hard as it may be, the best response is to raise your glass and wish your friend well. Then go back to your own investment goals and see how you are faring on those.
If that winning sector or fund is still keeping you awake, ask your adviser about the performance of the sector over the past five years. If the sector has done poorly for a few years and appears to only have started to turn, investigate further. If the sector is having a super year after a few good years, look elsewhere.
Remember, there are always opportunities in the market, and most often they are not the ones everyone is talking about.