rearview mirror past performance

Making Decisions Based on Past Performance

The first decade of the 21st century has been called a “Lost Decade” for investors. During that time, the U.S. stock market went through two bear markets before ending up flat for a ten-year period. This month marks the anniversary of a robust rebound. A regression to the mean known as a “Found Decade.”  In early March 2009, the financial crisis hit its bottom, at least as far as the stock market was concerned. From that time, until March 7, 2019, the total return of the S&P 500 has been 408%. 

Should we make investment decisions based on past performance?

The answer is no. Because that is making forward decision with a focus on the rear-view mirror. What we can learn from this chart is that during a period where stocks left much to be desired, bonds did their job. They preserved principal and paid steady income. An investor in 2009 had a choice to make. Do the last ten years tell me anything decisive about the years to come? Here is the chart of the next ten years for stocks and bonds:

  • It is out of our control. Past performance, while interesting to look at, is as out of our control as the future.
  • It can show us the possibilities. The past can’t tell us how an investment will perform in the future. But it can tell us what is possible. Stocks can be volatile. Bonds can underperform in a bull market. As investors, we should behave accordingly.
  • Market cycles can last a long time. Patience can and will be tested. But that is why investing is a “get rich slowly” exercise.

stay focused

  • Cost
  • Comparison to similar assets
  • Risk levels

None of these aspects will predict your returns. But these three features are within an investment manager’s control. This is not so with the performance of the markets. Be wary of looking backwards, you may miss the opportunity to come. Contact me at [email protected] if you want to talk this through.