Past performance
The Securities and Exchange Commission (SEC) requires a disclaimer “past performance does not guarantee future results” on when mutual performance is advertised. The SEC notes that the long-term investment performance of a fund will depend on factors such as: fund costs (charges, fees and expenses), your tax consequences, the fund’s risk, and operational changes.
Carl Richard equates “Investing based on past performance” with “Driving while looking in the rear view mirror”. Both “cause a lot of accidents”.
“Despite the SEC warning and pretty conclusive evidence that past performance has very little predictive value, most of us still use performance as the predominate factor in choosing our investments.
This is one of those times in investing when our experience in other areas of life works against us. “
“When it comes to mutual funds, however, the past has almost no predictive value. “ “It turns out that fees are the only factor that reliably predicts a fund’s performance. The higher the expense ratio –the cost of owning the fund-the worse the performance for shareholders. This is a case where you actually get what you don’t pay for.”
“Trying to figure out which fund will lead the pack…is a fool’s game. Focus instead on finding a low-cost investment that you can stick with over the long haul.”
The volume of articles and research studies showing that past performance promises nothing about future performance continues to grow. Understanding how an investment fits into your portfolio should be based on other factors, including those noted by the SEC. Understanding the investment’s characteristics and how they relate to the other investments in your portfolio are critical to building wealth.
