Investment Insights: Past Performance

Written by nickel - 7 Comments

A few weeks ago I wrote about the fact that, in the world of investing, past performance does not predict future returns. As a followup to this, I wanted to share a set of quotes relating to this topic that I ran across in The Bogleheads’ Guide to Investing…

“There is simply no way under the sun to forecast a fund’s future return based on its past record.”

John Bogle, Founder of The Vanguard Group

“Top performance lists are dangerous.”

American Association of Individual Investors

“For the 20 years from 1970 to 1989, the best performing stock assets were Japanese stocks, U.S. small stocks, and gold stocks. These turned out to be the worst performing assets over the next decade.”

William Bernstein, Author of The Four Pillars of Investing

“Fund rankings are meaningless when based on past performance, as most are.”

Jack Brennan, CEO of Vanguard

“Buying funds based purely on their past performance is one of the stupidest things an investor can do.”

Jason Zweig, Money Magazine

If you liked these quotes, be sure to check out “Investment Insights: Timing the Stock Market” and “Investment Insights: Staying the Course.”

Published on April 1st, 2008 - 7 Comments
Filed under: Saving & Investing
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Comments (scroll down to add your own):

This is one of the things I cringe at when listening to Dave Ramsey. When he talks to people about investing, he says nothing about asset classes (besides “growth, growth and income, aggressive growth, and international,” which aren’t really asset classes) but simply talks about “track record.” Dave is has a great method for getting out of debt, but I’m afraid some people are going to be surprised with their investments after taking his advice.
Comment by YoungMoneyHabits — Apr 1st 2008 @ 9:32 pm
Sounds like shorting the “best performers” could be a great strategy! The cover of this week’s Businessweek could be a treasure chest of potential shorts.
Comment by Ron@TheWisdomJournal — Apr 1st 2008 @ 11:13 pm
Jason Zweig, Money Magazine, uses TOO MANY WORDS:

“Buying [managed] funds … is one of the stupidest things an investor can do.”

In order to ‘pick’ a fund, you need to do as much analysis to ‘pick’ a stock … so why not invest directly in the stock, in the first place (and avoid the fund manager’s mark-up)?
Comment by AJC @ 7million7years — Apr 2nd 2008 @ 1:39 am
@AJC:

Why not? Because investing in individual stocks is a losing proposition unless you can buy nearly all stocks, in which case an index fund would be a lot easier to work with.

Buying individual stocks will cost a lot in transaction fees, and nobody has yet found a reliable, repeatable formula for beating the market indices over the long run.
Comment by MITBeta — Apr 2nd 2008 @ 8:57 am
Cute. You can add David Hume’s Induction fallacy to those. Just because the sun rose yesterday does not mean it will again today.

Unfortuneatly we have little other data available.

Regards,

Dorian
Comment by Dorian Wales — Apr 2nd 2008 @ 4:17 pm
@Dorian:

Actually, for every stock out there, there are reams and reams of data available about the company: quarterly reports, etc. Unfortunately, even professional analysts working for major brokerage houses do not have a very good track record of deducing what how any particular company will fare over the next period of time, mainly because the ultimate fate is driven by events that do not show up in such data and reports.

Therefore it is unwise and imprudent to invest in individual stocks or managed mutual funds.
Comment by MITBeta @ Don't Feed The Alligators — Apr 2nd 2008 @ 8:53 pm
People who are looking for some iron-clad insurance of a stock’s future performance are bound to be disappointed at some point… past performance is only one of the things people look at to lead them to a decision, as MITbeta points out, and it oughtn’t be the major one! The information available about a company might be enough to choke a horse, but at least you don’t have to rely on another person’s (sometimes tainted) opinions.
Jerry
Comment by Jerry — Apr 4th 2008 @ 12:54 pm