Are you seeing your investment returns through rose-colored glasses? Most investors are … and it’s often because their advisor has provided them with a skewed view.
Besides, colorful past performance doesn’t tell you much about your future prospects anyway. Let’s bring in a little common sense, and put investment performance in proper perspective.
Since at least 1962, a growing body of evidence has informed us that most incidents of investment outperformance are probably luck, not skill. Still, advisors pursuing active investing continue to trot out exceptional past performance as a reason to pile into past winners (especially when there’s a nice commission in it for them).
Even if we ignore the random nature of most outperformance, there’s another reason to be wary of past results. There’s a sneaky little thing called “survivorship bias,” causing the funds that “make it” to appear larger than life.
Check out today’s CSI and subscribe here if you want to get wise to these and other tricks of the trades.
Original post at pwlcapital.com.