Bigfoot, Broccoli and Performance

These things have nothing to do with each other. At the bottom of virtually every piece of marketing in the investments industry, you will see the following:

“Past performance does not guarantee future results.”

The Securities and Exchange Commission mandates that this disclaimer be put on all advertising and marketing materials. We want to believe past performance is an indicator of future results; after all, a person’s track record in business/sports/music/art gives us a pretty good idea of how they are going to do in the future. Unfortunately, in the portfolio management world, the past tells us very little about the future.  Consider the following from “The Persistence Scorecard” (“Does Past Performance Matter: The Persistence Scorecard”, December 2014):

  • Of the 681 funds that were in the top quartile as of September 2012, only 9.84% managed to stay in the top quartiles at the end of September 2014.
  • An inverse relationship exists between the measurement time horizon and the ability of top-performing funds to maintain their status.  It is worth noting that less than 1% of large/mid-cap funds managed to stay in the top quartile at the end of the five-year measurement period.
  • Only 5.84% of large-cap funds, 2.83% of mid-cap funds, and 7.95% of small-cap funds managed top-half performance over five consecutive 12-month periods

ENDURING IMPACT: Emotions can get in the way of executing a prudent investment strategy.  What feels good may not be good for your portfolio.  Rebalancing a portfolio never really feels good because it means the investor is selling what has done well in their portfolio and buying what hasn’t done as well; while the impact of this disciplined approach is selling high and buying low, it can be difficult to believe that approach is sensible at that point in time.  Clients and Advisors like to hire the managers that have delivered good performance over the last few years because it feels good; unfortunately, the data suggests it is unlikely that performance will carry over into the future.  At Enduring Wealth Partners, we do not hire managers on our clients’ behalf; instead, we invest in markets and give our clients the long-term, diversified exposure they need to help them achieve their goals. Read the full article

Eric Holt