Past result is not an indicator for future performance

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alexfoo39
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Past result is not an indicator for future performance

Post by alexfoo39 » Tue Jan 08, 2019 10:02 pm

Hi BHs :)

I often heard an argument against some 5-year or 10-year mutual fund or a specific company that one should not project into future what has happened in the short past.

Hence the phrase 'Past result is not an indicator for future performance' is used to suggest that nothing is sure in the future.

My question is:
Since the premise of the index fund is built on mathematical fact that over a long period of time the equity market as a whole yields the best performance, why then is the index fund immune to the same argument above?

For example, people often cite that equity yields some 8% to 12% over the long term. Isn't this statement also a result of projecting into the future what has happened in the past?

Appreciate input, thank you =) :beer

alex_686
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Re: Past result is not an indicator for future performance

Post by alex_686 » Tue Jan 08, 2019 10:21 pm

alexfoo39 wrote:
Tue Jan 08, 2019 10:02 pm
For example, people often cite that equity yields some 8% to 12% over the long term. Isn't this statement also a result of projecting into the future what has happened in the past?

Appreciate input, thank you =) :beer
Yeah, past returns of the S&P don’t indicate future returns. Backtesting is fraught with issuse.

I would rely on theory and forward forecasts, like CAPE10.
Last edited by alex_686 on Tue Jan 08, 2019 11:30 pm, edited 1 time in total.

iamlucky13
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Re: Past result is not an indicator for future performance

Post by iamlucky13 » Tue Jan 08, 2019 10:35 pm

Index funds are not immune. In fact, here's a statement from Vanguard shown on the information pages for every one of their index funds, and repeated in all of their prospectuses and annual reports:
The performance data shown represent past performance, which is not a guarantee of future results.
Sound familiar?

What you're referring to as a mathematical fact is really a historical fact. We have fairly high confidence a certain range of long term returns for a given asset class will continue in the future, but not a guarantee.

What index funds really provide is low costs, performance close to an asset class's average, and diversification within that class.

Diversification is arguably the most important consideration related to the disclaimer. The risk of all constituents of a given class significantly underperforming past results is a lot lower than the risk of a single constituent doing so. Index funds are not the only way to get that diversification, but they are probably the best.

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alexfoo39
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Re: Past result is not an indicator for future performance

Post by alexfoo39 » Tue Jan 08, 2019 10:53 pm

okay, i can digest the diversification part.

I saw some BHs comments that they are content with the certainty of outcome of index fund 20-year down the road. Isn't that misleading too?

ionball
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Re: Past result is not an indicator for future performance

Post by ionball » Tue Jan 08, 2019 11:18 pm

alexfoo39 wrote:
Tue Jan 08, 2019 10:53 pm
I saw some BHs comments that they are content with the certainty of outcome of index fund 20-year down the road. Isn't that misleading too?
I don't think there is much certainty in the world of investing. Risk is required and often the risk is rewarded. Sometimes the risk is punished or unproductive. Everyone needs to make their own assessment of how to manage risk. One could use history as a research foundation, then consider if the future may have differences that would influence any forward projections.

Tony-S
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Re: Past result is not an indicator for future performance

Post by Tony-S » Tue Jan 08, 2019 11:22 pm

alexfoo39 wrote:
Tue Jan 08, 2019 10:53 pm
I saw some BHs comments that they are content with the certainty of outcome of index fund 20-year down the road. Isn't that misleading too?
The certainty is that index funds with their low fees will outperform the average of actively-managed funds with their higher fees. Of course, if you have above average actively-managed funds, those can outperform index funds even when fees are included.

Topic Author
alexfoo39
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Re: Past result is not an indicator for future performance

Post by alexfoo39 » Wed Jan 09, 2019 1:26 am

Tony-S wrote:
Tue Jan 08, 2019 11:22 pm
alexfoo39 wrote:
Tue Jan 08, 2019 10:53 pm
I saw some BHs comments that they are content with the certainty of outcome of index fund 20-year down the road. Isn't that misleading too?
The certainty is that index funds with their low fees will outperform the average of actively-managed funds with their higher fees. Of course, if you have above average actively-managed funds, those can outperform index funds even when fees are included.
well said. The certainty that index fund will outperform majority of the mutual funds! haha

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alexfoo39
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Re: Past result is not an indicator for future performance

Post by alexfoo39 » Wed Jan 09, 2019 1:58 am

hmm, how about this?
“Never forget that in the long run, it is corporate earnings growth that produces stock price increases. If, over the very long term, the annualized earnings growth is about 5%, then the annualized stock price increase must be very close to this number”

“The key point, which we’ll return to again and again, is that the fundamental return of the stock market-the sum of dividends and dividend growth-is somewhat predictable, but only over the very long-term.”

– William Bernstein.

Ndop
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Re: Past result is not an indicator for future performance

Post by Ndop » Wed Jan 09, 2019 2:24 am

Costs are a big factor in future performance. Properly chosen index funds can minimize costs.

msk
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Re: Past result is not an indicator for future performance

Post by msk » Wed Jan 09, 2019 3:48 am

Piketty, Capital in the 21st Century, has done a huge amount of research going back 300 years in a number of countries. He found that Productive Real Estate has returned about 4% p.a. REAL and Trade and Industry 1 to 2% higher. All recent data (100 years!) indicate that stock markets have also done about 5% in REAL terms. My conclusion: humans are genetically programmed to accept no less than 5% REAL before they invest in Trade and Industry. RE looks "safer", hence a lower return, to many laymen, but no need for that discussion here. In my younger days I had a couple of years stint in Economics and Planning for a major operating division of a Fortune 10 company. No way we would even consider anything that did not promise at least 8% REAL in a very low-risk environment or 14% REAL in a moderate risk (often political risk) environment. Diversify satisfactorily and human greed will save your portfolio. There are always some not-very-clever individuals who somehow get to run huge companies and these individuals may be fully capable of bankrupting even huge companies; Xerox, Kodak, Enron... Diversify.

dumbmoney
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Re: Past result is not an indicator for future performance

Post by dumbmoney » Wed Jan 09, 2019 5:29 am

iamlucky13 wrote:
Tue Jan 08, 2019 10:35 pm
Index funds are not immune. In fact, here's a statement from Vanguard shown on the information pages for every one of their index funds, and repeated in all of their prospectuses and annual reports:
The performance data shown represent past performance, which is not a guarantee of future results.
Sound familiar?
Excuse me if I rant a little, but I've always hated that SEC mandated disclaimer. It's so weak! Even the greenest investor knows that past performance doesn't _guarantee_ future results. Meanwhile fund marketing is typically based entirely on past performance. Combined with the weak disclaimer, the investor is invited to give past performance prime consideration.
I am pleased to report that the invisible forces of destruction have been unmasked, marking a turning point chapter when the fraudulent and speculative winds are cast into the inferno of extinction.

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Dialectical Investor
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Re: Past result is not an indicator for future performance

Post by Dialectical Investor » Wed Jan 09, 2019 7:46 am

A few obvious points should clear this up:

1) Generalizations ease communication but sacrifice accuracy
2) Sometimes untrue things are stated
3) Sometimes such statements may be attributed to an act of force
4) Communication terminates in action or inaction
5) Communication objectives sometimes require falsehoods be stated

It's tempting to point out that indicate != guarantee, but that's not as relevant.

Blake7
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Re: Past result is not an indicator for future performance

Post by Blake7 » Wed Jan 09, 2019 8:20 am

Guarantee, no, but it is an indicator. We can’t make decisions about international vs. domestic, or bonds vs. equity vs. cash, ratios, etc. without looking at historical data. We have to make decisions based on these assumptions, but knowing there is no guarantee, and that diversification is necessary. The phrase is really just a legal disclaimer.

Old_Dollar
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Re: Past result is not an indicator for future performance

Post by Old_Dollar » Wed Jan 09, 2019 8:37 am

Why is the phrase “past performance is not an indicator of future results” always said in the negative light? A +20% year is not an indicator of high returns in the future. However, a -20% year is not an indicator of continued negative returns in the future. Doesn’t it go both ways and can’t the statement be one of optimism? Or am I being an idiot?
I am here solely to learn about investing.

Shallowpockets
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Re: Past result is not an indicator for future performance

Post by Shallowpockets » Wed Jan 09, 2019 8:50 am

The phrase is a non sequitur. It serves many purposes, the most being an excuse for both a fund prospectus and for Bogleheads where it is turned inside out.

Past reaults are, however, the ONLY thing we have. That is why BHs sit on it as a defense to managed funds and why the pundits try and decipher the past and apply it going forward.
There is a certain obstinate joy in sitting still as a BH while the world attempts to manuever itself into a better position. Every failure by these manuevers is thus an example to harden belief in the phrase.
"Past result not an indicater of the future."

We need the people who buck the sit and wait theme. Without them the reversion to the mean would not be a reversion but a flat line. Every angel needs it devil.

columbia
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Re: Past result is not an indicator for future performance

Post by columbia » Wed Jan 09, 2019 9:04 am

No one would invest in stocks, if they didn’t think that their past performance vs. bonds/cash wasn’t relevant to expected future returns.

All kinds of people predict the future, even if they don’t want to admit it.

MichCPA
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Re: Past result is not an indicator for future performance

Post by MichCPA » Wed Jan 09, 2019 9:19 am

This is SEC required CYA language. Bogleheads need to stop making it into anything more than that. It seems that here it can also be used to mean, "nobody knows anything" and "the past doesn't indicate anything about the future". It doesn't mean either of those things.

Should we stop expecting bonds (or even stocks) to change in price due to interest rates?

Should we expect money markets to outperform stocks or bonds over 5+ year periods?

No, because that has pretty much never been the case and there is no reason to believe that the basic facts of investing change in such drastic ways.
Last edited by MichCPA on Wed Jan 09, 2019 10:32 am, edited 1 time in total.

dbr
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Re: Past result is not an indicator for future performance

Post by dbr » Wed Jan 09, 2019 9:48 am

That mantra should probably be banned because it is too simplistic even if it contains a valid warning.

A most important point in this is that investment returns are highly variable and you are going to get only one outcome out of a wide range of possible outcomes. Even if the mean return of your investments were locked in exactly in advance, your actual outcome would certainly be different from the average. The same statement is true of the past. That past is one outcome from what was a wide range of possible outcomes ex ante. It is hardly likely two individual instances from an unchanging range of possibilities would actually be the same. That would be like imagining that one roll of four on a die would mean that the next roll has to be four even if it is the same unbiased die each time.

As a practical matter what you can try to estimate is the statistical distribution of returns using the historical sample to make your estimates and then adding uncertainty to account for the possibility that the statistical distribution is not constant over time. You can also try to make more complicated conditional estimates of the statistical distribution based on valuations etc. Still the outcome is statistical and there is no such thing as time diversification.

As a note, by statistical distribution we mean a range of possible outcomes for annual returns that can be characterized as having a certain form and certain parameters such as mean and standard deviation that quantify that form. In the case of investing even making that picture truly descriptive is problematic, but past data may allow an approximate description.

Tony-S
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Re: Past result is not an indicator for future performance

Post by Tony-S » Wed Jan 09, 2019 9:56 am

dbr wrote:
Wed Jan 09, 2019 9:48 am
That mantra should probably be banned because it is too simplistic even if it contains a valid warning.
As MichCPA noted above, it's mandated by the SEC and has been for many decades as a warning to investors. I think it's a great idea to have it because it makes an investor think twice (hopefully, more) before investing.

aristotelian
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Re: Past result is not an indicator for future performance

Post by aristotelian » Wed Jan 09, 2019 10:15 am

alexfoo39 wrote:
Tue Jan 08, 2019 10:02 pm

My question is:
Since the premise of the index fund is built on mathematical fact that over a long period of time the equity market as a whole yields the best performance, why then is the index fund immune to the same argument above?
It absolutely still applies to index funds. There is always the risk that some Black Swan event happens that is worse than anything we have experienced in history. Capitalism is only a couple hundred years old.

alex_686
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Re: Past result is not an indicator for future performance

Post by alex_686 » Wed Jan 09, 2019 10:44 am

alexfoo39 wrote:
Tue Jan 08, 2019 10:53 pm
I saw some BHs comments that they are content with the certainty of outcome of index fund 20-year down the road. Isn't that misleading too?
I personally think this is abuseive backtesting. There are people who want 100% equities. If you stretch the time frame long enough then equities beat bonds, so people keep stretching out the time frame to show that.

dbr
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Re: Past result is not an indicator for future performance

Post by dbr » Wed Jan 09, 2019 10:59 am

alexfoo39 wrote:
Tue Jan 08, 2019 10:53 pm
okay, i can digest the diversification part.

I saw some BHs comments that they are content with the certainty of outcome of index fund 20-year down the road. Isn't that misleading too?
As I tried to explain before, there is no certainty in the outcome anyone will actually get. Time diversification is a myth. Look at the chart in FireCalc that shows all the different outcomes depending on starting year and realize that someone starting today will get only one of all the possibilities.

If the contention is something more complicated such as that the chances of ending up with more money in stocks than in bonds increase as time goes on, then that is a supportable contention. However, a "certain" statement about "chances" is an understanding of "certainty" that needs a good deal of explanation and understanding and is ripe for misinterpretation leading to bad decisions.

garlandwhizzer
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Re: Past result is not an indicator for future performance

Post by garlandwhizzer » Wed Jan 09, 2019 1:32 pm

Nothing is absolutely certain over for a given market or asset class over any given period of time. We can't be certain that a giant asteroid or a nuclear war won't wipe out human life over the next ten years. That doesn't mean that we can't make decisions based on our best judgement. The degree of predictability varies with the question we ask. There are shades of uncertainty. Based on backtesting and fundamental analysis of the equity risk premium it is highly likely that over a period of several decades stocks will outperform bonds. That's about all you can say with a high level of certainty. Whether a single factor portfolio or a multi-factor portfolio with outperform a cap weighted index over a given time frame is IMO uncertain. When it comes to individual funds, if it a certain fund has outperformed in the past what is the probability that they will do so in the future? That chance is on average less a coin flip. Humility is the appropriate attitude when talking about the market's future. In general, the future is unknown and unknowable but even in an uncertain future what is very likely is that very low cost and very wide diversification will offer benefit to investors over the long term.

Garland Whizzer

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Re: Past result is not an indicator for future performance

Post by kolea » Wed Jan 09, 2019 2:15 pm

alexfoo39 wrote:
Tue Jan 08, 2019 10:02 pm
My question is:
Since the premise of the index fund is built on mathematical fact that over a long period of time the equity market as a whole yields the best performance, why then is the index fund immune to the same argument above?

For example, people often cite that equity yields some 8% to 12% over the long term. Isn't this statement also a result of projecting into the future what has happened in the past?

Appreciate input, thank you =) :beer
You are asking two different things. I will respond to each:

The idea that index funds are a better investment is based partly on looking at the alternative, which is actively managed funds. While some active funds outperform index funds in certain periods, it is hard to impossible to find an active fund which consistently out-performs an index fund. But the other part of the argument is that it can be shown mathematically that the optimal place to put a dollar of investment money is in a total market index fund. You can read about it here: https://web.stanford.edu/~wfsharpe/art/ ... active.htm

Your second question is about predicting market performance with an index fund. Yes, that goes on here and elsewhere. All I can say is that people try to rely on the principles above to justify passive index investing rather than on performance characteristics, but we're all human and try to guess what the future has in store for our portfolios. But I think people try to be cautious about that.
Kolea (pron. ko-lay-uh). Golden plover.

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Re: Past result is not an indicator for future performance

Post by MotoTrojan » Wed Jan 09, 2019 6:24 pm

Bonds have to beat inflation over the long run to remain viable and equities have to beat bonds over the long run based on corporate debt vs. equity structure (bond owners get paid first, thus less risky). How you define “the long run” is the real risk/concern. The market will take care of the rest, eventually :).

2015
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Re: Past result is not an indicator for future performance

Post by 2015 » Wed Jan 09, 2019 9:58 pm

garlandwhizzer wrote:
Wed Jan 09, 2019 1:32 pm
Nothing is absolutely certain over for a given market or asset class over any given period of time. We can't be certain that a giant asteroid or a nuclear war won't wipe out human life over the next ten years. That doesn't mean that we can't make decisions based on our best judgement. The degree of predictability varies with the question we ask. There are shades of uncertainty. Based on backtesting and fundamental analysis of the equity risk premium it is highly likely that over a period of several decades stocks will outperform bonds. That's about all you can say with a high level of certainty. Whether a single factor portfolio or a multi-factor portfolio with outperform a cap weighted index over a given time frame is IMO uncertain. When it comes to individual funds, if it a certain fund has outperformed in the past what is the probability that they will do so in the future? That chance is on average less a coin flip. Humility is the appropriate attitude when talking about the market's future. In general, the future is unknown and unknowable but even in an uncertain future what is very likely is that very low cost and very wide diversification will offer benefit to investors over the long term.

Garland Whizzer
Very nicely put. Unfortunately, humility is in short supply when ego is running the show.

Topic Author
alexfoo39
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Re: Past result is not an indicator for future performance

Post by alexfoo39 » Thu Jan 10, 2019 3:32 am

With English as my second language, I just realised that i put the phrase wrongly.

Past result is not an indicator for future performance

vs

Past performance is not an indicator for future result

No significant difference right?

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alexfoo39
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Re: Past result is not an indicator for future performance

Post by alexfoo39 » Thu Jan 10, 2019 3:40 am

wonderful discussion. I'm learning. :confused :confused

so can I still get 5% p.a. in 2030? haha

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bottlecap
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Re: Past result is not an indicator for future performance

Post by bottlecap » Thu Jan 10, 2019 8:27 am

Please use the forum search tool.

This question is asked every other week!

Basically, the phrase applies to mutual fund investments. And it isn't a law of investing. It's just something that is true a large majority of the time.

Asset class returns are not guaranteed, of course, but there are often good reasons that past asset class returns tend to revert to their mean.

Good luck,

JT

dbr
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Re: Past result is not an indicator for future performance

Post by dbr » Thu Jan 10, 2019 9:29 am

alexfoo39 wrote:
Thu Jan 10, 2019 3:32 am
With English as my second language, I just realised that i put the phrase wrongly.

Past result is not an indicator for future performance

vs

Past performance is not an indicator for future result

No significant difference right?
To answer your question we would need to understand what you mean by result distinct from what you mean by performance.

As far as that goes also to explain what an indicator is.

I think these issues of words are not just a matter of coming from a second language background. People for whom English is the first language would need to think through what they are trying to say with these expressions.

A suggestion would be to consider that when one is trying to predict the future behavior of an investment, what is the nature of what such a prediction should look like. I've already explained some ideas regarding what I think such a prediction might look like.

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