Chasing Performance Vs. Managing Risk: What Your Portfolio Says About Your Psychology

Have you ever invested in a mutual fund just because it was the top performer last year? Or maybe, you felt nervous watching your investment value fall and quickly switched to something that looked less risky?

If yes, you’re not alone. These common tendencies reveal something important -- not about your financial habits but about your psychology and its impact on your investment behaviour.

Investing is as much about emotions, habits and thought patterns as it is about numbers. The debate between chasing performance vs. managing risk is not only a financial one, but a psychological one too. In this article, we’ll break this down in simple language. Using real-world examples and behavioural finance insights, we’ll explore how your investment decisions reflect your thinking patterns — and how small changes can potentially lead to better long-term outcomes.

• Table of contents

• Understanding performance chasing
• Behavioural biases that influence your portfolio decisions
• How your portfolio reflects your investment psychology
• Striking the balance: Growth vs. stability
• Tools and strategies to avoid performance chasing
• Role of financial advisors in shaping investor behaviour

Understanding performance chasing

Performance chasing means jumping into an investment because it has recently done well, believing it will keep going up. This is a common habit, especially among new investors.

Some examples of performance chasing include:

• Mutual fund rankings: You see a mutual fund that gave 25% returns last year. Without checking anything else, such as risk metrics or consistency of performance over the years, you invest in it just because it topped the list. (Example is for illustrative purposes only).
• Hot stock tips: A friend tells you about a stock that doubled in 6 months. You buy it, even if you don’t know what the company does or what its fundamentals are, simply because “it’s doing well.”
• Switching funds too often: You jump from one mutual fund to another every few months, always chasing best performers, without giving any investment the time to potentially grow in the long term.

The problem with this behaviour is that what has worked for a fund in the past may not work in the future. Investing is more of a long-term approach and chasing quick gains can be risky and expensive.

Also Read: Chasing Returns vs. Wealth Creation: Suitable Approach

Behavioural biases that influence your portfolio decisions

So, why do investors tend to make such decisions, even if they may know better? This is where understanding behavioural finance in investments becomes important. Behavioural finance is a field of study that looks at how human emotions and psychology shape attitudes towards money. Among other things, behavioural finance looks at various cognitive biases (irrational decision-making tendencies) and how they affect your portfolio. Some common biases include:

• Recency bias: You believe that whatever just happened (a market rally or crash) will continue. So, you invest in funds that have recently performed well or panic-sell during corrections.
• Herd mentality: You follow what others are doing. For instance, if everyone around you is investing in small cap mutual funds, you do the same, even if it doesn’t suit your risk appetite or goals.
• Overconfidence bias: After one or two successful investments, you start thinking you can’t go wrong and take more risks than necessary.
• Anchoring bias: You get fixated on an initial piece of information, such as the purchase price of a stock, and refuse to sell it at a loss, even if it's hurting your portfolio.

These behaviours lead many people to chase performance rather than manage risk, often with negative results.

How your portfolio reflects your investment psychology

Your portfolio is like a mirror to your personality, reflecting how you think and feel about money. Some questions you should ask about your investments:

• Are most of them in high-return, high-risk assets?
  This may show you’re chasing performance and ignoring downside risks.
• Do you have too many similar funds or stocks?
  That may point to a fear of missing out (FOMO) or herd behaviour.
• Do you exit investments quickly when they fall a little?
  This could suggest low risk tolerance or a lack of long-term thinking.
• Is your asset allocation mismatched with your goals?
  You may be following trends rather than a clear strategy.

Understanding your portfolio helps you understand yourself, which is the first step to building a more strategic investment plan.

Striking the balance: Growth vs. stability

An investor shouldn't have to choose between growth and stability. Aiming for both in the right proportions is key. This is the heart of chasing performance vs. managing risk.

Risk management in investing means making choices that can protect your money from big losses, even if it means giving up some short-term gains. It may sound boring, but it’s actually better and is deeply tied to how our minds work.

You can strike a healthy balance by doing the following:

• Define your goals: Short-term goals need lower risk options like debt funds. Long-term goals can handle more equity exposure as there is more time to weather the ups and downs of the stock market.
• Use asset allocation: Spread your money across different asset classes, like stocks, bonds, gold, etc., so that one fall doesn’t crash your entire portfolio.
• Review regularly: Markets change, and so should your portfolio. But remember to review your portfolio with logic, not emotion.
• Don’t chase returns blindly: Look for consistency, not just high past returns. A fund that gives relatively steady returns may be more suitable than one that jumps between extreme highs and lows.

A strategic investor isn’t the one who wins big once. It’s one who works slowly and steadily towards building wealth in the long term and stays steady through the ups and downs.

Tools and strategies to avoid performance chasing

You don’t need to be a finance expert to avoid the performance trap. A few simple tools and habits can make a big difference.

• Systematic Investment Plan (SIP): Investing small amounts regularly through SIPs in mutual funds helps you avoid market timing and emotional decisions.
• Risk profiling: Many platforms offer a short quiz to help you understand your risk level. Use it before choosing investments.
• Investment tracking apps: These help you see your overall portfolio in one place, which is useful to avoid overexposure to one asset or sector.
• Fund research tools: Look beyond near-term returns. Check risk-adjusted returns and consistency before investing in mutual funds.
• Diversification: Don’t put all your money in one type of fund. Diversify across asset classes by combining debt and equity funds or opting for hybrid funds. Within equity, too, diversify across large, mid and small cap stocks, if you can handle the attendant volatility.

These strategies can keep you grounded, no matter how tempting that “top performing” fund might look.

Role of financial advisors in shaping investor behaviour

A financial advisor is a money expert and behaviour coach rolled into one.

Financial advisors can help with the following:

• Keeping you calm during market dips: Advisors help you stay invested during downturns when panic usually leads to bad decisions.
• Building a goal-based plan: They match investments with life goals, which helps you avoid random, return-chasing choices.
• Customising your risk exposure: Based on your age, income, and comfort level, they help create a mix of growth and safety.
• Explain the ‘why’ behind every decision: Advisors make sure you understand the reason for each investment, reducing emotional or rushed decisions.

If you often find yourself switching funds or feeling unsure, talking to a financial advisor can bring clarity and confidence.

Also Read: Wealth Creation Vs. Chasing Returns: The Smart Investor's Dilemma

Conclusion

Your portfolio tells you as much about your mindset as it does about your money. Whether you’re chasing top returns or managing your risks, your decisions are shaped by your feelings, beliefs, and biases. Chasing performance vs. managing risk isn’t a one-time choice. It’s a lifelong balancing act. But when you understand your behaviour, use the suitable tools, and seek advice when needed, you start making decisions based on logic and not just emotion.

FAQs

What is performance chasing in investing?

Performance chasing is when you invest in mutual funds or stocks just because they’ve done well recently, without checking if they fit your goals or risk tolerance.

How does investor psychology affect portfolio decisions?

Our investments can sway this way or that based on emotions like fear, greed, and overconfidence. These feelings often lead to poor decisions, like panic selling or chasing top performers.

Why is managing risk more important than chasing returns?

Chasing returns can lead to big losses if markets turn. Managing risk can help mitigate the impact of volatility on your capital and keep your investments relatively stable during ups and downs.

What are common behavioural biases in investment decisions?

Some common biases include recency bias, herd mentality, overconfidence, and anchoring. If one is not aware of these biases, they can lead to poor investment choices.

How can I balance risk and return in my investment portfolio?

Use asset allocation, invest through SIPs, review your portfolio regularly, and set clear goals. Avoid emotional decisions and seek professional advice if needed.