Retirement Weekly: Why past performance is meaningless — when it comes to investing

by | Oct 21, 2022 | Stock Market

Q.: I read one of your columns about investing overseas in which you wrote, “…past performance is actually a very poor criteria for picking funds.” What makes you say that? —Tanner in Georgia A.: Tanner,

Every fund you look at will present to you in multiple places a disclaimer such as “Historical performance is no guarantee of future returns“ or “Past performance is not predictive of future results.” It’s easy to brush that warning off as a CYA requirement but it is nonetheless true. Past performance as a selection criterion makes intuitive sense. It is difficult to label a fund manager or management team as skilled if their past performance is weak. You wouldn’t hire a lawyer, a surgeon, or a stylist if you didn’t see a track record of success. Likewise, if you want a top performing fund relative to its peers or a benchmark, it is natural to look to see who has performed well. Unfortunately, the data doesn’t support the intuition. There is a significant body of studies examining the performance of mutual funds. Top performing funds typically do not remain top performing funds. Even merely above average funds tend not to stay above average for very long. Academics say that there is no “persistence” in performance. The most widely known study of persistence is probably S&P’s Persistence Scorecard. It is much easier reading than …

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