The Hype of Past Performance

In the world of investing, we all should consider a few things before picking where to park our hard-earned money. Questions about how much volatility you can stomach, how long you will invest, and the purpose behind the investment are common, but if you’re like most investors, some attention is given to performance. And so it should be!

But is past performance the best indicator of future performance? Based on research and experience, our vote is a big NO!

A Major Player in Fund Performance

It’s easy to be drawn to high performing funds. Who doesn’t want an impressive rate of return – which may or may not come with some bragging rights? Despite the appeal of double-digit earnings, a handful of studies show that past performance isn’t a real indicator of future reward. In fact, the biggest predictor of a fund’s performance is cost.

Every fund has a built-in cost of doing business, known as the expense ratio. Portfolio managers are paid to create and maintain a bundle of various investments within a single fund, making it easy for you as the investor to participate in a well-rounded, diversified investment. The expense ratio pays for that convenience by reducing your total return.

A recent study by Morningstar, the leading global research provider on investments, broke down the importance of costs when it comes to picking your investments. The data reveals that across all asset classes, the least expensive funds outperformed more costly options each and every time. 

Staying in Control

So how do you make sure you stay in control of your investment portfolio’s overall cost and total performance? Start with your investment style. Active funds, or those which chase returns in an attempt to outperform the market, have higher costs than their passive counterparts. Despite the appeal in terms of performance, research shows that active funds do not consistently provide higher returns over time (that’s before and especially after costs!). 

That’s because chasing performance is less about skill and more about uncontrollable luck.

Passive investments – those which track an index in an attempt to reflect the performance of a specific market – have far lower fees, leading to less drag on your total return. Investment managers who follow a passive management style don’t get caught up trying to beat the market, but instead, they focus on creating consistency and simplicity in their investment choices.   

At Jones Hill, we understand that to reach your goals you need investments that perform well over time. Instead of focusing on the hype of outperformance, we help you construct investment portfolios that are low-cost, tax-efficient, and in line with your tolerance for risk – all which allow you to enjoy your life without wasting time chasing unicorn returns. 

Contact us today for a discussion about your investment objectives and how we can lend a helping hand.