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Special Section Investmental illness: A guide to getting well

Investors who look out the rearview mirror suffer from this syndrome. Remember: Past performance already happened.

Alfred Hitchcock syndrome

Sufferers of Alfred Hitchcock syndrome frequently invest by looking out the (ahem) "rear window" instead of at the road ahead. In advanced stages, sufferers of this syndrome may also exhibit religious delusions, as they begin to worship at the "Church of What's Working Now." This is dangerous, because what's working now has a way of not working for very long. These investors, therefore, run the risk of buying into asset classes after most of the money has already been made.

Case in point: The top mutual funds in 1999 were Internet and Japanese small-cap funds. And investors flocked to them in droves. As the year drew to a close, Jim Callinan, portfolio manager of RS Emerging Growth, won Morningstar's top honors as fund manager of the year, with a stunning 183 percent return on the strength of then red-hot Internet business-to-business plays. Callinan made the cover of investment magazines everywhere, and investors, suffering from the throes of Alfred Hitchcock syndrome in its then-terminal phase, piled into the fund, based solely on his accomplishments of the previous two years. The rear window was enticing, indeed.

Within weeks, the stocks in Callinan's portfolio began to hemorrhage value: The fund lost 25 percent in 2000, 27 percent in 2001 and then 40 percent in 2002. Callinan's returns, relative to aggressive growth peers, were in the bottom 15 percent of his category in each of those three years. The fund has still not caught up to its 1999 peak. Everyone who bought the fund half a decade ago on the strength of short-term results has lost money. Such is the destructive power of Alfred Hitchcock syndrome.

Treatment: To combat Alfred Hitchcock syndrome, ask yourself some questions concerning your portfolio.

Ask yourself these questions:

"I usually walk people through market history," says Margaret Starner, a financial adviser in Coral Gables, Fla.

Her advice: Remember the big picture. Things that looked good last year are unlikely to continue their outperformance. Diversify.

-- Posted: July 31, 2006
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