It is a natural reaction for institutions and individuals to want to find out how much money their investments have earned or lost. This holds the investment community accountable and is an important requirement of successful investing.
However, over-consideration of an investment’s past gains and losses lead to actions with the expectation that gains will be repeated and losses avoided. The actions are often counterproductive.
This article advocates for ending reliance on past returns to make investment decisions.
The following factors, collectively, are generally considered to be superior to past performance as predictors of investment returns.
For an Investment Being Evaluated
- Investment objectives or policies
- Skill, experience and tenure of managers and research teams
- Investment methodology
- Investment style
- Closures, mergers, reorganization
- Fees and expenses
- Organizational changes
- Asset growth or shrinkage
For All Investments
- Asset class
- Market capitalization
- Applicable inventions, discoveries, technological breakthroughs
- Government actions, laws, regulations
- Economy, economic policies
- Consumer interests and demand