Friday Finance: Past performance is no guarantee of future performance

This is an extract from The Poor Man’s Guide to Financial Freedom: A Realistic, 10-Step Manual to Building Liberating Wealth on a Small to Medium Budget.

Past performance is no guarantee of future performance

Here’s a common rookie investing error: you see that Acme Corp. goes up 14% in 2018.  Then it goes up another 16% in 2019.  You think, I must buy Acme shares, and quickly!  You buy . . . and then in 2020 the share price falls by 22%.  : (

Just because an investment has enjoyed a certain return in the past does not mean that it will continue to earn that return in the future.  Except for fixed investments like term deposits/CDs, returns will vary from year to year.  A recent, rapid rise in house prices does not mean that you ought to be investing more in real estate.  A sudden increase in Megadeth memorabilia does not mean that you should rush out to buy garish Megadeth t-shirts.  In fact, a recent rise might mean the pendulum is about to swing back the other way and prices will fall.

Edit: Newbs often make the mistake of picking out the managed fund that’s had the best performance over the last five years only to find that it stinks over the following five years.

Instead of chasing yesterday’s winners, invest broadly in ways that suit your own financial goals and risk profile.  Don’t chop and change according to short-term fluctuations.  Stick to your own plan over the long term and reap the rewards.

Further edit: This is called FOMO (Fear of Missing Out). If everyone online is boasting about how they made a killing on bitcoin, for example, the natural human impulse is to go buy bitcoin so that we, too, can make a killing – only to find that the easy money has already been made.

This is not a recommendation against bitcoin. Rather, it is a general warning to avoid chasing after yesterday’s winners, whatever they were.

Unless you are highly competent, neither should you go chasing after tomorrow’s winners. The best bet is to diversify and let the future take care of itself.

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2 comments

  1. freemattpodcast · 8 Days Ago

    Not to bet “all on red” but to measure a few decent bets at many different positions. Pro gamblers at horse races do some of this.

    Like

  2. Pingback: OK, we are having high inflation. What now? – Dark Brightness

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