Past performance is not indicative of future results

Financial professionals of any form or fashion are required to use the phrase, “Past performance is not indicative of future results” when speaking of an investment’s history. Investors’ eyes seem to glaze over upon hearing this. They seem to brush off the statement as just a required line. But in some important ways, this phrase needs to be reinvigorated.

A recent meeting with a prospective investor reminded me why this statement is so important. The investor came for advice on where to allocate a portfolio so as to not sacrifice growth potential, reduce risk and plan for retirement income. His stance was that mutual funds and annuities posed a significant risk to him as an investor. He wanted to look at better options, such as Preventative Wealth Care strategies. In our meeting, he indicated previously meeting with a firm that utilized individual stock picks in the “good” times while reallocating to bond (mutual) funds in the “bad” times.

For most of us, we’ve heard this before. A proper mix of stocks and bonds (60/40, for example) would have returned seven or eight percent annually since 1926, right? Not even remotely likely, primarily because “past performance is not indicative of future results”. Here are a few points to realize:

  • Bond funds can potentially do well in a falling interest rate environment, which we had for the past 35 years. But now interest rates are near zero. What happens to bond funds in an unprecedented low- or rising-interest rate environment? They falter as bond values sink and interest rates rise. This will negate the performance of the past. Interest rates, for the most part, have nowhere to go but up. This is why past performance is not indicative of future results.
  • Moving forward, mutual funds have even more of the same issues as bond funds, but are affected differently. Rising interest rates make it difficult for corporations that issue stock to borrow to purchase capital, reinvest in their own stock price or service their own debt, among many other issues. There’s a reason monetary policy on raising interest rates is called “restricting the economy”.
  • Individual stock pickers have the same issues as mutual funds, but take on additional risk of less diversification to promote the theory of each individual stock choice.

Fortunately for this investor, he understood why this phrase is important to understand. There’s a reason the statement is so emphatically enforced in this industry: Times change and so does investing. Certain markets only rise, fall and then “come back”, until they don’t. This is the primary driver for the important regulation of why past performance is not indicative of future results.

I emphasize to investors not only to be careful who you listen to, but also how you listen. You have at least two things to consider when you hear that “past performance is not indicative of future results”. First, caution regarding the investment’s potential to underperform its historic numbers. And second, consider that message a blessing. The true net returns on the majority of mutual funds, exchange-traded funds and variable annuities over the past 16 years have been so abysmal that you better hope that “past performance is not indicative of future results”. In this case, Preventative Wealth Care strategies can help make up for lost time.


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