The Great Illusion of Past Performance
Past performance is not a guarantee of future returns. This is such an important piece of information the SEC requires that a similar statement accompany any discussion of performance. So why do so many investors still use historical performance data to pick funds?
Past performance is a comforting lazy validation of how a fund’s strategy worked in the past—a favorite of performance chasers who end up missing out on the best of the market and frequently missing their investment goals.
Chasing performance is irrational because it seeks only to beat the market. You don’t need to beat the market, you need to achieve your financial goals. Pursuing greater rewards brings greater risk that you won’t achieve your objective. You can’t control or predict the market. You CAN control how much you are saving, your portfolio allocation and following a disciplined
While not as easy as looking at a fund’s past performance, how you think about and understand risk, how long you have to achieve your goals and what specific role a fund will play within your portfolio is the key information that guides good decisions. Understanding how a fund’s fees and expenses impacts your goals is WAY more important than past performance because these will
definitely occur in the future.
Looking at past performance to predict future returns is like your friend who dates online and hopes that tomorrow’s date didn’t post a ten year old photo.