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Whenever you read articles about investing they always say that past mutual fund performance is a poor indicator of future results. But advertising of mutual funds keeps promoting how well the specific fund, fund family, and fund managers have done in the past. I am confused! It seems like the advertising is contradicting the common advice!
Here is an example: People on this board are always promoting Vanguard Wellesley and Wellington Mutual Funds because they have done well in the past, but if past mutual fund performance is a poor indicator of future results, how do we know we should buy these two very popular funds?
you never know it is as simple as that .fidelity Magellan was the top fund for a long long time , until it was terrible after peter lynch left .
the fund is only the fund if the person doing the picking is the same and the strategy works ..
i never believed in buying any fund forever . i use a method that exploits them when they tend to do better and swaps them when there are better choices for the big picture . that has produced very nice gains for 30 years for me .
I think past behavior of sectors or types of investments is a good way to predict future results. For example, small technology stocks are more likely to perform either very well or very poorly than a company like 3M (MMM). (Old guard huge mature companies are less volatile.) Small technology companies are high standard deviation stocks.
Now is it possible that these types of stocks will become less volatile in the future, yes, but unlikely.
in the end bad investor behavior ends up doing most small investors in anyway . what fund it is in becomes almost irrelevant since as a group investors suck and do not even match the funds return they were in . it gets worse the more volatile the markets get too .
following the money trail generally shows 2 to 3% difference as to what investors got as a group vs the funds they were in .
for many small investors worrying about performance from diversified funds is almost like worrying about arraigning the deck chairs on the titanic . they will not even see what the fund they picked got because of poor investor behavior .
you can see for yourself by just clicking on morningstar investor returns instead of the funds return .
Whenever you read articles about investing they always say that past mutual fund performance is a poor indicator of future results.
It's not a poor indicator, it's just an indicator of a fund's average. It's important to look at the longer term average of a fund 5 and 10 years out. One year may be an anomaly; 10 years or more gives you some important information and allows you to set your expectation.
Wellington and Wellesley funds have been around for decades so there's a lot of history and 1 or 2 years is not going to greatly change their overall average returns when you look at 20 years of returns.
Whenever you read articles about investing they always say that past mutual fund performance is a poor indicator of future results. But advertising of mutual funds keeps promoting how well the specific fund, fund family, and fund managers have done in the past. I am confused! It seems like the advertising is contradicting the common advice!
Here is an example: People on this board are always promoting Vanguard Wellesley and Wellington Mutual Funds because they have done well in the past, but if past mutual fund performance is a poor indicator of future results, how do we know we should buy these two very popular funds?
Your thoughts and analysis would be helpful.
The Wellington and Wellesley funds are very low cost and that's why they get recommended a lot. Low cost usually leads to better performance and more consistently than superior stock picking does.
But, stock picking and active management might be coming back. With so many passive funds and ETFs a lot of money is invested without supervision, so to speak. With less investing based on research it opens the the opportunity for stock pickers. There's less research so markets aren't as efficient. These inefficiencies can be exploited by people who know what they're doing.
Whenever you read articles about investing they always say that past mutual fund performance is a poor indicator of future results. But advertising of mutual funds keeps promoting how well the specific fund, fund family, and fund managers have done in the past. I am confused! It seems like the advertising is contradicting the common advice!
Here is an example: People on this board are always promoting Vanguard Wellesley and Wellington Mutual Funds because they have done well in the past, but if past mutual fund performance is a poor indicator of future results, how do we know we should buy these two very popular funds?
Your thoughts and analysis would be helpful.
What I have read, and what prospectuses (?) will say, is that past performance is no guarantee of future performance (or is not an indicator of future performance). That is true.
The experts do NOT say, that I've ever seen, that past performance is a poor indicator of future performance.
If a fund is a certain type that you're looking for, and if it's self-directing (an index fund, for example), it is likely that performance will continue OVER THE LONG TERM, generally. For example, value funds tend to perform a certain way, growth funds tend to perform a certain way (depending on their concentration of sectors), etc.
But an active fund's past performance may not be an indicator of future performance if several situations exist. One thing is...is the manager and management team the same? If not...performance is likely to be different. Is it a young fund? If so, it hasn't had performance during years of an opposing economic environment (a 5 year old fund has not experienced a serious recession, for example). Also, did the direction of the fund change? That can happen. If it does, the mix of stocks may change, and that would change performance.
If I look at a fund's performance and see that it has failed to beat the S&P most years, I probably wouldn't buy it, since I'd expect that to continue (or at least there's no evidence that would change). I'd be better off buying a cheap S&P index fund. UNLESS I'm looking for a high dividend, in which case I might trade better total return performance for a higher dividend now.
There are no guarantees. I have a number of things I look at, when looking for a fund to invest in. Past performance is one of those things, but there are others. Remember, past performance is meaningless for an active fund, if there were different managers during that time or the purpose/focus of the fund changed.
Whenever you read articles about investing they always say that past mutual fund performance is a poor indicator of future results. But advertising of mutual funds keeps promoting how well the specific fund, fund family, and fund managers have done in the past. I am confused! It seems like the advertising is contradicting the common advice!
Here is an example: People on this board are always promoting Vanguard Wellesley and Wellington Mutual Funds because they have done well in the past, but if past mutual fund performance is a poor indicator of future results, how do we know we should buy these two very popular funds?
Your thoughts and analysis would be helpful.
So you bring up some good points. First, several people here have correctly stated what the saying is. Second, there is a reason you get the 1,3,5,7 and 10 year performance for a fund. It's a trend on how the fund has done. Third, from there you can determine how the fund has performed over time, has there been any return of capital, has there be large turn over in the portfolio, is it the same fund manager and how long have they been doing it, have that had any tax issues (for global or heavily weighted funds). Have the fund goals changed or been amended and why?
ALL of these things can affect overall performance & can skew results. Simply looking at past performance without any of the additional research can give the wrong picture of how that fund will work or compliment the portfolio.
And THAT is why it is new guarantee of future performance.
Volatility matters, and relative volatility matters absolutely. If a fund has been closely tracking the S&P 500, perhaps slightly beating it overall, that's suggestive of future performance being similar. If the fund gyrates from year to year, outperforming handsomely one year, lagging grievously the following year, etc., then it's hard to make any worthwhile prediction. Of course, this is just a statement of how the fund will do relative to the markets. No prediction is made about the markets themselves. If we have a nuclear war next Tuesday, no knowledge about past performance would matter in the least. But in that case, we'd have more to worry about, than our portfolios.
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