We all know that choosing a mutual fund based entirely on past performance is a pretty poor idea. Well, we “know” it, but that apparently doesn’t stop us from doing it anyway. After all, the reason the mutual fund companies spend so much time and money promoting the results from their best-performing funds is that it brings in money. Lots of it.
And, if I’m honest with myself, I have to say that I do it as well (on some level at least). For example, if a fund had:
- An investment strategy that was 100% in-line with my own,
- A team of managers with plenty of experience,
- Low costs, and
- A long track record of poor results…
…would I be reluctant to invest in it? You bet I would.
In fact, I can’t even imagine investing in a fund without looking at its results.
So, given that most of us really do make investment decisions based (at least in part) upon past results, my question is this:
Why not look at results from relevant time periods?
Everywhere we look, we see 1-year, 3-year, 5-year, and 10-year records of performance. If we’re looking at equity funds, the only one of those that matters at all is the 10-year record. And what about the 20-year and the 30-year records? I’d like to see those too, please. Doesn’t it make sense to look at periods of time that are roughly equal to the amount of time we foresee holding the fund?
In other words, if we’re going to hold a fund for 20 years, how about looking at how it’s done over 20-year periods?
And if we’re going to use past performance, why don’t we at least broaden our data set? Rather than just look at the last 10-year period, how about looking at all the 10-year periods since the fund has been around? Let’s see the best, worst, mean, median, etc.
I’m far from convinced that we can use past performance to accurately select funds that are likely to perform highly. But if we’re going to attempt to do so, it seems like we might as well try and use data that could be relevant, rather than this 1-year and 3-year return garbage.
Regardless, I still think that which fund you invest in isn’t nearly as important as your ability to stick with your plan.
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