We’ve all seen the mutual fund disclaimer: “Past performance is no guarantee of future results.” But if we’re honest with ourselves for just a moment, don’t we all look at a fund’s track record to see if it’s worth investing in or not? If the track record is negative or has a downward trend, a fund won’t get a second look by the average investor. But if the fund has positive historical numbers or an upward trend in a graph, the game’s afoot.
So what is the purpose of that silly investment disclaimer we all read but ignore? It must serve the same purpose as the warning on cigarette boxes that essentially read: “The Surgeon General has determined that cigarette smoking may be hazardous to your health.” We ignore that warning (as a nation), and we smoke. And Americans die from smoking-related causes every day.
We ignore the investment warning, and we invest in funds based on their past performance. And we lose money every day, to marketing hype, magazine ads, talking heads on cable news channels, newsletter forecasts, economic outlooks, online ads, etc.
Unfortunately for us as investors, the warning is quite true. Investing based on past performance is like driving while looking in the rearview mirror. What’s happened in the past is past. Predicting the future based on the past is a fool’s game. Anyone who wants you to make an investment decision based on a future prediction is trying to sell you something. That includes PhDs, economists, newsletter writers, talking heads, investment gurus, etc.
The bottom line is that no one really knows what will happen in the future. But we do love to try and predict the future, yes? That predilection for prediction runs in our blood: sports, the weather, political elections, interest rates, inflation, wars, the stock market, etc.
So what about you: do you base your investment decisions on past performance? Are you, perhaps unwittingly, trying to predict the future? I have a solution, but I’m curious to know what you think. What can you do to limit the tendency to self-inflict financial damage to your investments by trying to predict the future??