Why Past Performance Doesn't Predict Future Returns

The Past Performance Disclaimer Exists for a Reason

Every fund and many investment products say it: "Past performance is not indicative of future results." Yet investors still chase last year’s winners. Research shows that yesterday’s top performers often become tomorrow’s laggards. This article explains why and what to focus on instead.

Why Past Performance Fails to Predict

Markets are forward-looking. By the time a fund or stock has had a great run, much of the good news may already be in the price. What drove the outperformance—sector luck, a hot manager, or a one-time catalyst—often doesn’t repeat. Meanwhile, mean reversion is common: extreme winners often cool off, and some underperformers improve. So the best performer over the last 5 years is rarely the best over the next 5.

What the Data Shows

Studies of mutual funds and ETFs repeatedly find that top performers in one period often land in the bottom half in the next. S&P’s SPIVA reports show that most active managers underperform their benchmark over 10 and 15 years. Picking funds based on recent returns is a weak strategy. The same idea applies to individual stocks: a stock that doubled last year might fall or tread water next year.

What Actually Matters More

Instead of chasing returns, focus on factors you can control or that have better long-term evidence:

• Costs: Lower fees mean more of the return stays in your pocket. Low-cost index funds have a structural advantage.
• Diversification: Spreading risk across many holdings reduces the damage from any single failure.
• Asset allocation: How much you hold in stocks vs bonds has a big impact on long-term risk and return.
• Time horizon and behavior: Staying invested and not panicking in downturns matters more than picking the hottest fund.

How to Choose Investments Without Chasing Performance

Pick a simple, low-cost portfolio (e.g., broad index funds) that matches your risk tolerance and time horizon. Rebalance periodically. Ignore "best funds of the year" lists. If you want to tilt toward factors like value or quality, do it with low-cost products and a long-term plan—not because something was last year’s winner.

Conclusion

Past performance is a poor guide to future results. Build a low-cost, diversified portfolio, stick to your plan, and avoid the temptation to chase what just worked. Your future self will thank you.