My Love/Hate Relationship With ‘Past Performance’

“Past performance is not indicative of future results.”

Sound familiar?  If you have invested in any regulated investment of any form, you have read or heard this phrase before.  I have to be honest.  Even as a professional advisor, when I read this and explain it to clients there is something about it that gets on my nerves.  Don’t get me wrong, I’m not saying it’s untrue or that I don’t believe it.  We don’t know what the future returns of our investments are going to be.  We don’t know the exact short-term direction of an investment, and if anyone tells you that they do, you should find another advisor because you will be set up for failure.

If I really think about why this phrase annoys me, I think it is because I want to find some certainty with an investment’s outcome. Doesn’t everyone?  At the root of this feeling, I think what it is really percolating is the innate desire to give clients an investment that does exactly what we thought it would do over the period of time we discussed in advance.  Wouldn’t that be nice? The discussion would go something like this during a financial checkup:  “Joe and Sally, we’ve been preparing for retirement for years, and the big day is the end of this year.  Since your investments will provide 7.2% over the next year (ironic compliance note: this is a joke and not a real investment), you picked a really good time to make this leap.  Any questions?”  Now that would make my job–and your retirement–really easy, wouldn’t it?

And then I wake up to reality.

Experience and a desire to learn from the past shows any advisor what strategies usually work better than others when it comes to investing over time.   If we at Waypoint were interested in selling products happily offered from large Wall Street firms and insurance companies that would pay us very well for doing so (which we’re not*), we could talk about certain “guarantees” (guarantees backed by the the very companies issuing the product, whose interests are their profits more than yours.  But I digress). Instead, we’ve learned of the benefits of uncertainty, and the returns that our investments can achieve for proper risk-taking and diversification.  We’re compensated over time for risks that we take.  If we don’t take certain risks, we’re simply not compensated. It’s a trade off, and one that is not only true with investments but in life as well.

To explore the topic of past performance and future results in more depth, there is no better example in recent history than that of international versus domestic stocks.  International stocks have under-performed U.S. stocks since 2008.  Does this mean we abandon a diversified portfolio or make drastic changes?  Director of research for the BAM Alliance Larry Swedroe breaks this down for us in the attached article, and reminds us of how our behavioral biases can quickly lead to regret when it comes to investing.  More importantly, he reminds us of the benefit of patience and properly allocating our investments.  You can find that article here: Tracking Error Regret Is the Enemy of Investors .

In the meantime, let’s control what we can with our investments and then submit to the notion that we can’t do anything about uncertainty and the market’s future direction.  That might not sell on the financial news network, but I’m sold on it because over time it’s an effective way to achieve real results (Sorry, but with no guarantees and yes–past performance is still not indicative of future results).


*Waypoint is only compensated directly from clients, which removes the conflicts of interest that are pervasive in the investment industry

Pete Dixon, CFP®

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Pete Dixon, CFP®

Partner and Advisor