Past Performance Is No Guarantee of Future Results

It's a phrase Wealth Management Advisors repeat often. Yet when I meet with prospective new clients who have been managing their own investments, past performance is often the primary factor they used when selecting investments. 

The conversation usually goes something like this: "When it comes time to review the funds available in my 401(k), 403(b), IRA, or brokerage account, I look at the performance numbers and move my money into the funds that have done the best." 

That seems logical, doesn't it? Pick the winners. 

Sometimes that approach works. If you happen to buy an investment while it is still on its winning streak and sell before conditions change, you may benefit. The challenge is knowing when those conditions will change.  That is where many investors run into trouble. 

The U.S. Securities and Exchange Commission (SEC) cautions investors that past performance does not necessarily predict future results and that investment performance should be considered alongside many other factors, including fees, economic conditions, risk, and an investor's personal circumstances. ¹ 

To illustrate the point, let's consider bank certificates of deposit (CDs). 

Suppose an investor purchased a five-year CD when interest rates were relatively attractive. At the time, the investment may have looked like a clear winner based on its guaranteed rate. When the CD matured five years later, however, renewal rates could have been significantly lower because interest rates had changed. The investment that once appeared attractive based on past results might no longer offer the same opportunity going forward. 

The lesson is not that CDs are good or bad. Rather, it demonstrates that what worked during one economic environment may not work as well during another. 

The same principle applies to mutual funds, exchange-traded funds, stocks, bonds, and other investments. Market leadership changes. Interest rates rise and fall. Economic conditions evolve. Fund managers change. Valuations fluctuate. Industries move in and out of favor. 

An investment's historical return tells us what happened. It does not tell us what will happen next. 

That is why investment decisions should involve more than simply chasing yesterday's top performers. 

My perspective is this: I would not do my job without the assistance of a large and reputable research and due diligence team. At Schulfer & Associates Wealth Management, we utilize the resources available through LPL Financial to help evaluate investments and monitor changing market conditions. 

Research and ongoing monitoring are intended to help us make informed decisions by considering factors such as economic conditions, company fundamentals, interest rate movements, portfolio diversification, manager changes, valuations, and other evolving market data. While no process can guarantee results, we believe disciplined research and thoughtful planning are preferable to relying solely on what performed best in the past. 

That's why I often remind clients: Past performance is no guarantee of future results.