Past Performance Does Not Predict Future Returns
I was just reading through Vanguard’s “Portfolio Construction for Taxable Investors” when I ran across a bit of data that underscores the old saw about past performance off the stock market not predicting future returns…
In short, they provided U.S. equity data from 1985-2005 that showed that less than half of all mutual funds that ranked in the top quartile (i.e., the top 25%) in a given three year period ranked in the top 50% of funds in the next 3 year period. In other words, recent “overperformers” stand a better than even chance of underperforming the market as a whole in the near future.
While there are some problems with these data, not the least of which is a good bit of survivorship bias (i.e., a disproportionate number of underperforming funds find themselves in the “missing” category going forward), they still highlight an important lesson…
Don’t go chasing yesterday’s winners in hopes of turning a quick buck.
Just to add another voice to debate, William Bernstein, author of “The Four Pillars of Investing,” has used similar logic to argue that:
“…high previous returns usually presage low future returns, and low past returns usually mean high future returns.”
Filed under: Saving & Investing
About the author: Nickel is the founder and editor-in-chief of this site. He's a thirty-something family man who has been writing about personal finance since 2005, and guess what? He's on Twitter!
Related articles...
» Investment Insights: Past Performance» Carnivals – Week of 03/17/08
» The Best of March 2008
» Lending Club 2010 Performance
» Investment Performance: Average vs. Compound Returns
» Four Ways To Ruin Your Investments – Guaranteed
» Series I Savings Bond Rates – November 2011
» Expense Ratios as Predictors of Mutual Fund Performance
Was this article useful? Please sign up to receive our content via e-mail:
10 Responses to “Past Performance Does Not Predict Future Returns”
Leave a Reply
Top Cards by Category
Earn $100 cash back after spending $1,000 in eligible purchases in the first 3 months of Cardmembership. Get 3% cash back at supermarkets, 2% cash back at gas stations and department stores, and 1% cash back on all other purchases.
Turn purchases into free travel: Enjoy travel rewards with no travel restrictions or blackout dates - get points for flights on any airline, stays at any hotel, and car rentals with any company.
Turn purchases into free travel: Enjoy travel rewards with no travel restrictions or blackout dates - get points for flights on any airline, stays at any hotel, and car rentals with any company.
No Balance Transfer Fee!* 0% Intro APR for up to 15 months on purchases and balance transfers. This card offers Blueprint, free and customizable account features that help you avoid unnecessary interest and pay your balances down faster.
Earn up to 5% cash back* in categories that change and enjoy a 0% introductory rate for 15 months on Balance Transfers and 15 months on Purchases.
Enjoy a 0% introductory rate for 18 months on Balance Transfers and 6 months on Purchases. Earn up to 5% cash back in categories that change.
Get rewarded for what your business already spends. Unlimited rewards potential - Membership Rewards(R) points have no limit to the amount you can earn and no expiration date.
0% intro APR on purchases for 9 months, then the variable standard purchase APR of 12.99% - 18.99%*. 5% Cashback Bonus in categories that change like gas, restaurants, department stores and more. Limitations apply*. Up to 1% unlimited Cashback Bonus on everything else. No annual fee.
0% intro APR on purchases and balance transfers for 15 months, then the variable standard purchase APR of 10.99% - 19.99%.* Earn 2% cashback automatically at gas stations and restaurants. Great rewards with no annual fee, no rewards redemption fee, and no additional card fee.
This is a prepaid reloadable debit card with a rewards program. No credit check needed and no activation fee. There is a $4.95 monthly fee, reduced to $0.99 monthly if you load $500 each month.
- How to Become a Millionaire
- How to Get Out of Debt
- The Best Dollars I've Ever Spent
- How Our Estate Plan is Structured
- How We Paid Our Mortgage In Less than 10 Years
- Money Making Ideas
- How to Manage Your Asset Allocation with Multiple Accounts
- Consumption Smoothing - Save While the Saving's Good
- How to Save on Groceries
- How Much Life Insurance Do You Need?
- Eleven Great Books About Money
- Dave Ramsey is Bad at Math
- Dish Network Customer Service SUCKS
- $8,000 Homebuyer Tax Credit
- Pay Off Mortgage Early or Invest?
- How to Claim the First-Time Homebuyer Tax Credit
- Reduced Credit Limits? Share Your Experience
- $15,000 Homebuyer Tax Credit
- Ethanol Blended Gas = Lower Mileage?
- Termite Control: Sentricon vs. Termidor
- How Much Should You Pay a Babysitter?
- Will Mac OS X Lion Kill Quicken 2007?
- Federal Income Tax Rates Went Down but Your Federal Tax Withholding Increased. Here's Why...
How to save money on insurance
- Being Too Frugal Can End Up Costing You Money
- Check Fraud: Use a Shredder -- and Hope Everyone Else Does, Too!
- HSA Contribution Limits for 2013
- How to Close an Ally CD Early
- Seven Ways to Make Big Bucks at Your Garage Sale
- What's the Lowest Possible Credit Score?
- $250 Signup Bonus from Citi ThankYou Preferred
- How to Help Your Family Financially - and Stay Sane
- Average Price of a New Car?
- Lending Club Recovered Funds from Defaulted Loans
March 11th, 2008 at 8:16 am
Funny that this should come up just now. I am 3/4 of the way through A Random Walk Down Wall Street and this point could not be any more clear.
I was also showing the Mrs. a list of fund selections available for our daughter’s 529 plan, and it’s interesting that all of these funds still list 1, 3, 5 year and since inception performance, with a * that points you below: “Past performance is not an indicator for future performance.”
This reminds of the story about how the casinos figured out that by posting the results of the last couple of dozen Roulette wheel spins they increased their profits by getting people to bet on trends that have no influence on the next roll, rather than betting on odds.
March 11th, 2008 at 8:48 am
I find it interesting that I hear more people talk about the past returns of funds rather than what it is exactly that the fund is invested in. Just the other day a co-worker told me that he was looking into a fund that a friend recommended that has averaged about 14%. No idea what the fund invested in.
March 11th, 2008 at 8:57 am
This cannot be emphasized enough.
Just last week I had a big debate with a ‘financial advisor’ who berated index funds, saying managed funds outperform, and that his firm ’screens’ for underperforming managers.
Performance chasing is the best known way to lose money.
March 11th, 2008 at 10:34 am
At one point a few years ago I had a revelation with “buy low, sell high”. It seems so obvious, but the point is to take good strong companies (probably everyday names) and buy them when their prices are low. Then sell them when prices are high. You can always buy them back again when they dip. So simple, yet so hard to get through my thick skull. I’ve applied this principle to several stocks – buying, selling, re-buying and re-selling several times. Never underestimate the simple phrase “buy low, sell high”
March 12th, 2008 at 10:25 am
That’s why most investors will be better off investing in index funds and get “average” performance.
Most investment strategies out there are not good for the long term. They work for several years, then stop working untill everyone gives up on them. Think about Dogs of the Dow. It “worked” till the 1990’s and then it underperformed the market..
March 12th, 2008 at 10:36 am
The “buy low and sell high” mantra is heard across the internet investment boards almost universally, but it is in practice often just a form of market-timing, and market-timing is frowned upon by many financial professionals when used by individual (as opposed to institutional) investors.
No doubt investors of equities want their shares to increase in worth, and the planned, periodic purchases of additional equities/fund-shares during the accumulation phase of acquisition is the consensus opinion of many of the most respected personal finance writers on how to go about building your investment portfolio.
March 12th, 2008 at 10:49 am
Ria: I agree, and I didn’t mean for my closing line to suggest that people should try to time the market. Rather, I was contrasting that with the inevitable outcome of chasing hot fund performance, which typically results in buying high and selling low. The exact opposite of what you want.
March 12th, 2008 at 12:11 pm
Nickel:
You may not have suggested it, but KC certainly did…
March 12th, 2008 at 12:14 pm
Ah, yes. I missed the connection between Ria’s and KC’s comments. I’m with Ria on this one.
March 12th, 2008 at 2:48 pm
Yes it’s an amazing world of Asset Management wherein you are not held guilty even if you perform badly going forward and yet you get paid for managing someone’s money.
http://www.my2dimes.com/
Nitin @ My 2dimes