The concept of chasing the market can be viewed as a reactive approach to investing, rather than a proactive strategy. Chasing the market involves making investment decisions based on recent events within the market, rather than on forecasts about how the market will look in the short term. Choosing to go with the approach tends to minimize the opportunity for realizing the best possible return on the investments, since the investor is always lagging behind the market in his or her activity.
When an investor is understood to be chasing the market, two factors are almost always involved. First, securities are not purchased until the rise in value has already begun. What this means for the investor is that he or she misses the chance to purchase the security at a lower price per share. Buying after a rise instead of before means lost revenue for the investor. The amount of return that can have been realized from the investment is diminished accordingly, and can never be recovered.
Second, chasing the market often involves a failure to trade investments until after the price per share has begun to fall. In this scenario, the investor does not use projections to get an idea when the value of an asset is likely to enter a slump. Instead, the security is traded only after the downward spiral has begun. For every day that the investor fails to act, he or she loses money on the investment. Selling after a fall rather than before is a good way to decrease the overall value of a stock portfolio in a very short period of time.
While every investor is likely to overlook market trends from time to time and thus ends up chasing the market, this is often the exception rather than the rule. A wise investor will attempt to keep abreast of what is happening in the market and try to relate those events to the future performance of various securities that make up the portfolio. Investors who choose to make chasing the market their basic investment strategy will lose out on significant opportunities to make money, as well as incur losses that could have been easily avoided.
