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Top 10 Investor Errors: Past Performance vs Future Results

Posted By Barry Ritholtz On July 8, 2012 @ 12:00 pm In Apprenticed Investor,Investing,Mathematics | Comments Disabled

This Sunday morning we reach the ninth in our series of investor errors. This one’s title comes from the standard Wall Street boilerplate disclaimer that is on everything investment related: “Past performance is no guarantee of future results.”

Despite its ubiquity, it is routinely ignored by investors.

Every hot mutual fund manager who is on the cover of some investing magazine, every trader who made a one shot killing, every strategist who accidentally stumbled into a lucky call: Many people chase the gurus, looking for a little magic that will make them wealthy.

Sorry, it doesn’t work that way.

Consider: The Morningstar mutual fund rating 5 star ranking attracts lots of new investors and lots fresh dollars. The primary factor in the rating is (can you believe it?) past performance. This despite a Morningstar study that found 5 star funds mostly underperform — my assumption is it’s a case of simple mean reversion.  As it turns out, the fund’s expense ratio is a much better predictor of performance (See results here).

When making any investment, make sure you are not merely chasing a hot quarter or two. Note that there are 10,000 hedge funds and 12,000 mutual funds and very few consistent managers generating sustainable, repeatable returns.


1. Excess Fees [1]
2. Reaching for Yield [2]
3. You Are Your Own Worst Enemy [3]
4. Asset Allocation vs Stock Picking [4]
5. Passive vs Active Management [5]
6. Mutual Fund vs ETFs [6]
7. Neglecting the Long Cycle [7]
8. Cognitive Deficits [8]


Top 10 Investor Errors
1. High Fees Are A Drag on Returns
2. Reaching for Yield
3. You (and your Behavior) Are Your Own Worst Enemy
4. Asset Allocation Matters More than Stock Picking
5. Passive vs Active Management
6. Mutual Fund vs ETFs
7. Not Understanding the Long Cycle
8. Cognitive Errors
9. Confusing Past Performance With Future Potential
10. When Paying Fees, Get What You Pay For

Article printed from The Big Picture: http://www.ritholtz.com/blog

URL to article: http://www.ritholtz.com/blog/2012/07/top-10-investor-errors-past-performance-vs-future-results/

URLs in this post:

[1] Excess Fees: http://www.ritholtz.com/blog/2012/06/top-10-investor-errors-fees/

[2] Reaching for Yield: http://www.ritholtz.com/blog/2012/07/top-10-investor-errors-reaching-for-yield/

[3] You Are Your Own Worst Enemy: http://www.ritholtz.com/blog/2012/07/top-10-investor-errors-you-are-your-own-worst-enemy/

[4] Asset Allocation vs Stock Picking: http://www.ritholtz.com/blog/2012/07/asset-allocation-vs-stock-picking/

[5] Passive vs Active Management: http://www.ritholtz.com/blog/2012/07/top-10-investor-errors-passive-vs-active-management/

[6] Mutual Fund vs ETFs: http://www.ritholtz.com/blog/2012/07/top-10-investor-errors-mutual-fund-vs-etfs/

[7] Neglecting the Long Cycle: http://www.ritholtz.com/blog/2012/07/investor-errors-neglecting-long-cycles/

[8] Cognitive Deficits: http://www.ritholtz.com/blog/2012/07/top-10-investor-errors-cognitive-errors/

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