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Fund Spy

The Funds That Got Away and Why You Should Let Them Go

Beware of hindsight bias when comparing what you own with what you wish you owned.

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The analyst's son cast for his last fish of the last night of summer vacation. Moments later, after a big splash and a mild oath, all the teen had was a snapped fishing line and conjecture about what swam off with his bait. The one that got away already has grown large enough to eclipse the memory of all the other fish he caught the previous week.

Like young fishermen, investors fret and dream about missed opportunities. Lots of investors find themselves more obsessed with the investments they should have made than with ones they actually bought. You can learn from studying past decisions, but pining after today's big winners because you didn't buy them yesterday can get you in trouble.

You could fall prey to hindsight bias, thinking that the historical results of a hot fund or asset class were inevitable and thus easy to predict. From there it's easy to conclude the future will be just as foreseeable and that tomorrow's top performer will seem like a no-brainer. Furthermore, fixating on the results you could have had instead of how you achieved the results you got can lead you to misjudge your strategy and make unnecessary alterations. Just because you took a pass on a fund that turned out to be a world-beater doesn't mean you didn't have sound reasons to do so or that you're not following a legitimate process.

Dan Culloton does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.