Is past performance an indication of future performance?


It is tempting to leave this blog post there.

So why are investors so worried about it? We are always asked if we can perform any better than the current/last/next lot. The answer is no one knows, not even the person who games hindsight by investing the same amount into both options.

Look at two equal investments started at the same time, relative to each other, at any moment in time and the difference between them is more likely to be made up by difference in risk or cost. Neither of which has anything to do with performance.

If we accept that markets always advance and only have temporary setbacks then we know that investing will always return growth above inflation. The cost of your adviser can make a big difference and the amount you allocate to shares can make a big difference. The ability to outperform in that equation pales into insignificance.

And yet….

All the marketing in the world of finance focus on results, returns, Alpha, manager’s individual brilliance. Asset allocation is boring to a marketing person and many a farmhouse has been bought in the South of France by not focusing investors minds on cost. In fact most of the glossy marketing in the finance sector is a case of the classic magician’s trick of misdirection.

So as with most things in finance the answer is simple.

  1. Repay your debts.
  2. Pay into an ISA/Pension.
  3. Manage your own money unless you have a lot.
  4. Employ an adviser if you do but be cost aware.
  5. Invest passively to the extent that you can cope with the ups and downs.

And stop relying on past performance.

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