Is Past Performance an Indicator of the Future?

Driving while looking in the rear view mirror.

Posted on

I recently came across an article by Dan Frommer discussing the downfall of dial-up internet and the Era of Broadband. He had a graph (see below) showing the decline of AOL and the rise of Netflix from the 3rd quarter of 2001 through the end of 2012. The first thing I thought when I saw this chart was that AOL, the king of the internet years ago, has really lost its way as a company. AOL was not able to adapt fast enough to the broadband internet era and has now become overshadowed by competitors. This is a perfect example of the statement: “Past performance is no guarantee of future performance”. On the other hand, Netflix is up more than 100% over the last year. Will this performance be repeated? I don’t know, but what I do know is that looking in the rear view mirror to pick stocks is an accident waiting to happen.

Our brains are often hardwired to look for patterns, even when patterns do not exist. It was very common to have clients ask about investing in gold after it had risen in value quickly last year. Even though they could not explain to me why gold would keep going up, they still wanted to buy it because they assumed it would. Investors often tend to have a habit of performance chasing. As soon as they see a hot asset class, they pull their money out of their investments and pour it into something new, often essentially buying high and selling low. We believe that you should have a well-diversified portfolio of stock mutual funds based on a plan designed to fit your needs, instead of chasing performance.

Driving while looking in the rear view mirror is one way to get yourself killed.

AOL and Netflix Chart

Discover Ways to Make Bonds Work for You

Bonds Ebook

Learn about how bonds can help secure your wealth in retirement. We’ve compiled our best advice about bonds in this FREE ebook.

Download it now to learn:

  • Why You Should Still Believe in Bonds
  • How to Build a Bond Ladder
  • How Much to Invest In Stocks vs. Bonds
  • When to Rebalance Your Ratio of Stocks to Bonds
  • The Difference Between Premium and Discount Bonds
  • If Bonds are So Good, Why Can’t I Just Invest in Bonds?
  • Bond Funds and Their Common Traps

Learn to Make Bonds Work for You

Bonds Ebook

Learn how bonds can help secure your wealth in retirement with this FREE ebook.

Download it now to learn:

  • ✔ Why You Should Still Believe in Bonds
  • ✔ How to Build a Bond Ladder
  • ✔ How Much to Invest In Stocks vs. Bonds
  • ✔ Bond Funds and Their Common Traps

…and more!

We guarantee 100% privacy. Your information will not be shared.

Archives

It's Your Money

Read Rick's articles
Rodgers & Associates
2025 Lititz Pike, Lancaster, PA 17601
Phone: 717-560-3800, Toll-Free: 888-876-3437