Investment Hindsight is 20/20: But Where Does That Get You?

Investment Hindsight is 20/20
Investment Hindsight is 20/20
PART 1: Past Performance Is (Still) No Guarantee

“For time will teach thee soon the truth. There are no birds in last year’s nest.”
— Henry Wadsworth Longfellow

Is there an investor alive who hasn’t heard or seen the ubiquitous disclaimer that past fund performance does not predict future success? The data continue to reveal that this disclaimer remains as relevant as ever. And yet it’s still often ignored. In investing, it’s important to be clear-headed about the facts, lest we succumb to false hope, especially when it comes to considering past “winning” investments.

Fund managers Dimensional Fund Advisors recently released a research paper, “The Mutual Fund Landscape” to explore the evidence. The paper concludes: “Confronted with so many fund choices—and lacking an investment philosophy to guide their search—some investors resort to picking funds that have strong track records, reasoning that past outperformers will continue to outpace their benchmarks. Does this assumption pay off? The research offers strong evidence to the contrary.”

Dimensional evaluated the track records of stock funds with past “winning streaks,” i.e., funds that outperformed their benchmarks for three, five and seven years, as of year-end 2009. They then assessed how those same funds fared during the next three years, 2009–2012.

    • Funds with THREE-YEAR winning streaks – From the 1,189 funds that outperformed from 2007–2009, nearly three-quarters failed to repeat their wins during 2009–2012.
    • Funds with FIVE-YEAR winning streaks – From the 918 funds that outperformed from 2005–2009, again, nearly three-quarters failed to outperform during 2009–2012.
    • Funds with SEVEN-YEAR winning streaks – From the 597 funds that outperformed from 2003–2009, more than three-quarters failed to outperform during 2009–2012.

On the fixed income side, there were far fewer bond funds with good track records. About 100 funds qualifying for each of the initial three-, five- and seven-year periods ending in 2009. For these, continued outperformance during 2009–2012 hovered between 43–50 percent. In other words, picking funds based on past performance seems at best a coin toss; portfolio-wide, it becomes more of a recipe for failure than success.

But that’s not all. There are additional ways we must keep a sharp eye on the evidence, lest we be tricked – or trick ourselves – into altering the mutual fund landscape. Dimensional’s report outlines two other significant hurdles that make it even more challenging to rely on past performance as a predictor for future success: survivorship bias and expenses. We’ll explore these factors in our next blog post.

____________________________________________________________________________

SAGE Serendipity
If you live with two voracious appetites like we do – otherwise known as my teenage sons – and if you live near Bernardsville, NJ, I suggest you look no further than River Bend Farms for a wonderful source of pasture-raised beef, pork and chicken (and yummy fresh eggs). As a bonus, it’s a beautiful drive to get there.


Sheri Iannetta Cupo, CFP®, is Founding Principal of SAGE Advisory Group, based in Morristown, NJ, an independent, Fee-Only Registered Investment Advisory firm, specializing in providing busy professionals and their families with holistic financial life planning and investment management services. You can find more here: www.sageadvisorygroup.com where this post originally appeared. You can also connect with Sheri on Twitter, Google+ and LinkedIn.

35 COMMENTS

  1. 854037 778054I adore what you guys are up too. Such clever function and exposure! Maintain up the quite good works guys Ive incorporated you guys to my own blogroll. 241485

  2. 321869 142527BTW, and I hope we do not drag this too long, but care to remind us just what kind of weapons were being used on Kurds by Saddams army? To the tune of hundreds of thousands of dead Talk about re-written history 259256

  3. 303626 530520Hello! I merely would wish to offer a huge thumbs up for that great information youve here during this post. I will probably be returning to your site to get more soon. 701506

  4. The next time I just read a blog, I hope so it doesnt disappoint me about this blog. I mean, It was my solution to read, but I personally thought youd have something interesting to convey. All I hear is a handful of whining about something you could fix in the event you werent too busy trying to find attention.

  5. Hey there just wanted to give you a quick heads up. The words in your content seem to be running off the screen in Firefox. I’m not sure if this is a format issue or something to do with internet browser compatibility but I figured I’d post to let you know. The design look great though! Hope you get the issue fixed soon. Kudos

  6. What i don’t understood is actually how you’re now not actually a lot more well-liked than you may be right now. You’re so intelligent. You understand therefore significantly when it comes to this matter, produced me personally imagine it from a lot of various angles. Its like men and women aren’t involved except it¡¦s something to do with Girl gaga! Your personal stuffs outstanding. All the time maintain it up!

  7. Hey There. I found your blog using msn. This is a very smartly written article. I will be sure to bookmark it and return to learn extra of your useful info. Thanks for the post. I will definitely return.

  8. An additional issue is that video gaming has become one of the all-time greatest forms of entertainment for people of nearly every age. Kids have fun with video games, and adults do, too. The XBox 360 is probably the favorite games systems for those who love to have a huge variety of activities available to them, and who like to experiment with live with people all over the world. Thanks for sharing your thinking.

  9. Hiya, I’m really glad I have found this info. Nowadays bloggers publish only about gossips and internet and this is actually irritating. A good site with interesting content, that’s what I need. Thank you for keeping this web site, I’ll be visiting it. Do you do newsletters? Cant find it.

  10. Thanks for your advice on this blog. One particular thing I wish to say is that often purchasing electronic products items through the Internet is not something new. Actually, in the past decades alone, the market for online electronic devices has grown considerably. Today, you will find practically virtually any electronic system and other gadgets on the Internet, from cameras along with camcorders to computer pieces and video games consoles.

  11. Howdy! I know this is kinda off topic however I’d figured I’d ask. Would you be interested in exchanging links or maybe guest authoring a blog post or vice-versa? My website goes over a lot of the same topics as yours and I feel we could greatly benefit from each other. If you’re interested feel free to shoot me an e-mail. I look forward to hearing from you! Superb blog by the way!

  12. Via my observation, shopping for gadgets online can for sure be expensive, however there are some principles that you can use to acquire the best discounts. There are constantly ways to locate discount discounts that could make one to have the best consumer electronics products at the smallest prices. Thanks for your blog post.

  13. Just desire to say your article is as amazing. The clearness on your publish is just cool and that i can think you’re an expert on this subject. Fine together with your permission let me to take hold of your RSS feed to keep up to date with impending post. Thank you a million and please carry on the enjoyable work.

  14. Having read this I believed it was very informative. I appreciate you spending some time and effort to put this information together. I once again find myself personally spending a significant amount of time both reading and posting comments. But so what, it was still worthwhile!

  15. Hey! Someone in my Myspace group shared this website with us so I came to take a look. I’m definitely loving the information. I’m bookmarking and will be tweeting this to my followers! Outstanding blog and fantastic style and design.

  16. I’m really impressed with your writing skills and also with the layout on your weblog. Is this a paid theme or did you customize it yourself? Anyway keep up the excellent quality writing, it is rare to see a great blog like this one nowadays..

  17. I think other web site proprietors should take this web site as an model, very clean and excellent user genial style and design, let alone the content. You’re an expert in this topic!

LEAVE A REPLY

Please enter your comment!
Please enter your name here