past performance

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Shem002
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past performance

Post by Shem002 » Tue Mar 05, 2019 4:49 pm

After looking at countless threads on this forum about asset classes and allocation I can't wrap my head around the issue of past performance. Many state on this forum that past performance is no indicator of future performance which I agree to a certain extent but not 100%. When reading through articles supplied by Vanguard, Fidelity, Schwab, etc. about asset classes, allocation, and volatility they generally use past performance as reasoning. Even the three fund portfolio (which I like) must use past performance to set allocation amounts because the US/International equity ratio isn't market weight and is lower than Vanguard, Fidelity, and Schwab's target retirement US/International equity ratios. Please keep in mind I am not trying to be extreme with this question just trying to obtain other individuals view points.

alex_686
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Re: past performance

Post by alex_686 » Tue Mar 05, 2019 5:06 pm

You need to read this somewhat in context.

At the highest level, past performance is of limited use for predicting future performance. See the Efficient Market Hypothesis, a very misunderstood concept. Basically, past performance and stock movements have no predictive power. A good example is length of bull market / bear market. Many people think that there is a relationship. Take a look at a chart and your eyes will pick one out every 10 years or so. Pull out your statistical tool kit and you can't find it.

Now, let us dig down a bit further.

We can use past performance to test theories ex post facto. For example, Equity Risk Premium and Beta. That is, risk and return are linked. You want higher return - you need to take higher return. Diversification is another. Specifically bond / equity allocations, domestic v foreign stocks, etc. Various factors like Size, Value, Momentum, Low Beta, etc.

Now, while the basic theory can be validated, you can't assume the inputs are constant. Stock return and volatility are time dependent. Prove the theory but you will struggle to find the right inputs for your formulas.

Now, some people will use past performance to argue that one strategy offers higher returns. For example, Small Value. However even proponents will acknowledge you need long times spans - 10 years - to see the extra performance.

Others, like myself, will use past performance to build portfolio that better match our goals and risk tolerance. Getting the right balance between equities and bonds for example. However, once again, you have to struggle with inputs.

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David Jay
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Re: past performance

Post by David Jay » Tue Mar 05, 2019 5:16 pm

Shem002 wrote:
Tue Mar 05, 2019 4:49 pm
After looking at countless threads on this forum...
Yup, and here comes another one. The reason is that the discussion is “angels dancing on the head of a pin” territory.

Here is the way I would put it: theory + past performance illuminates [but does not guarantee] the future.

Past performance alone is like correlation in statistics. Past performance is not indicative of future performance, just as correlation does not indicate which variable is cause and which variable is effect (or if the correlation is purely spurious - there is always an illustration of this in every stats intro text).
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

megabad
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Re: past performance

Post by megabad » Tue Mar 05, 2019 5:31 pm

Shem002 wrote:
Tue Mar 05, 2019 4:49 pm
After looking at countless threads on this forum about asset classes and allocation I can't wrap my head around the issue of past performance. Many state on this forum that past performance is no indicator of future performance which I agree to a certain extent but not 100%. When reading through articles supplied by Vanguard, Fidelity, Schwab, etc. about asset classes, allocation, and volatility they generally use past performance as reasoning. Even the three fund portfolio (which I like) must use past performance to set allocation amounts because the US/International equity ratio isn't market weight and is lower than Vanguard, Fidelity, and Schwab's target retirement US/International equity ratios. Please keep in mind I am not trying to be extreme with this question just trying to obtain other individuals view points.
Well it is parsing words a bit, but a suppose a better phrase would be "past performance is not a good indicator of future performance". However, it is all we have. Statistically studies have shown that even the best information we have in the the past predicts less than half of future performance in equities (and I question even these studies). The only real predictions I feel good about are those that have sound structural backing (ie. bonds will likely return less than equities over the infinite time scale). But in the broadest sense, it is all just a guess. I would have been wrong for the last 30 years if I lived in Japan.

MichCPA
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Re: past performance

Post by MichCPA » Tue Mar 05, 2019 5:41 pm

This is an SEC mandated CYA disclosure maneuver, not some know-nothing-ism you should apply to your strategy without further analysis.

Some here seem to want to say that no past information is relevant, but I disagree. Think of the past investing history like a stove. You probably know from when you are young that stoves can be hot, so you need to be careful. Similarly, in investing the past is an example of what can happen (the stove is on/hot) not what will happen (the stove is cold/off).

This does not mean that the past isn't relevant or that we can't learn from it, just that the future may or may not be similar and we should use past lessons to inform ourselves of likely outcomes.

The know-nothing-ism should be rejected because certain fundamental relationships that have held throughout time and are supported by logic. Therefore they can be expected to hold true at a macro level. (Bonds drop as interest increases, Low interest rates drive higher PE, performance of junk vs investment grade, etc.)

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Vulcan
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Re: past performance

Post by Vulcan » Tue Mar 05, 2019 5:46 pm

Shem002 wrote:
Tue Mar 05, 2019 4:49 pm
After looking at countless threads on this forum about asset classes and allocation I can't wrap my head around the issue of past performance. Many state on this forum that past performance is no indicator of future performance which I agree to a certain extent but not 100%. When reading through articles supplied by Vanguard, Fidelity, Schwab, etc. about asset classes, allocation, and volatility they generally use past performance as reasoning. Even the three fund portfolio (which I like) must use past performance to set allocation amounts because the US/International equity ratio isn't market weight and is lower than Vanguard, Fidelity, and Schwab's target retirement US/International equity ratios. Please keep in mind I am not trying to be extreme with this question just trying to obtain other individuals view points.
Standard three-fund portfolio recommends approx. market shares of US and Intl (50/50).
With the advent of Admiral shares of Total World Stock three-fund portfolio should no longer be viewed as the default starting position, however.
Unless one feels that they have some unique insight on past performance (yes) that allows them to outguess the market, owning the entire world in a single mutual fund is easier than ever.
Last edited by Vulcan on Tue Mar 05, 2019 5:54 pm, edited 1 time in total.
If you torture the data long enough, it will confess to anything. ~Ronald Coase

MichCPA
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Re: past performance

Post by MichCPA » Tue Mar 05, 2019 5:46 pm

megabad wrote:
Tue Mar 05, 2019 5:31 pm
I would have been wrong for the last 30 years if I lived in Japan.
Diversification is important. The macro-level laws of investing are less likely to hold for individual companies/countries/industries, etc. I agree that you should expect the past to hold true more in terms of relationships of securities to each other and macroeconomic factors than a raw return number.

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willthrill81
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Re: past performance

Post by willthrill81 » Tue Mar 05, 2019 5:47 pm

I don't believe that any sane person genuinely believes that past performance has no bearing on the future whatsoever. If they did, they would have a very difficult if not impossible task in trying to determine what on earth to invest in.

The real question then becomes to what extent past performance impacts the future. That is a matter of opinion as it can only be known in hindsight. In some historic instances, the past was a very good indicator of what would happen in the future, and in others, just the opposite happened.

YMMV. All roads carry risk.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

megabad
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Re: past performance

Post by megabad » Tue Mar 05, 2019 5:52 pm

MichCPA wrote:
Tue Mar 05, 2019 5:46 pm
megabad wrote:
Tue Mar 05, 2019 5:31 pm
I would have been wrong for the last 30 years if I lived in Japan.
Diversification is important. The macro-level laws of investing are less likely to hold for individual companies/countries/industries, etc. I agree that you should expect the past to hold true more in terms of relationships of securities to each other and macroeconomic factors than a raw return number.
Definitely agree. Ironically, one of the reasons I chose the Japan example is that the vast majority of investors have a gigantic home bias. US investors are definitely not immune to this. In fact, I would argue that if the US bond market tanked, a huge swath of US retirees would be in pretty dire straights.

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willthrill81
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Re: past performance

Post by willthrill81 » Tue Mar 05, 2019 5:59 pm

megabad wrote:
Tue Mar 05, 2019 5:52 pm
MichCPA wrote:
Tue Mar 05, 2019 5:46 pm
megabad wrote:
Tue Mar 05, 2019 5:31 pm
I would have been wrong for the last 30 years if I lived in Japan.
Diversification is important. The macro-level laws of investing are less likely to hold for individual companies/countries/industries, etc. I agree that you should expect the past to hold true more in terms of relationships of securities to each other and macroeconomic factors than a raw return number.
Definitely agree. Ironically, one of the reasons I chose the Japan example is that the vast majority of investors have a gigantic home bias. US investors are definitely not immune to this. In fact, I would argue that if the US bond market tanked, a huge swath of US retirees would be in pretty dire straights.
If the U.S. bond market tanked, it would almost certainly throw all other nations' financial markets, either directly or indirectly, into a terrible tailspin.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

megabad
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Re: past performance

Post by megabad » Tue Mar 05, 2019 6:32 pm

willthrill81 wrote:
Tue Mar 05, 2019 5:59 pm
If the U.S. bond market tanked, it would almost certainly throw all other nations' financial markets, either directly or indirectly, into a terrible tailspin.
But your statement was exactly the point I was trying to make about Japan in a general sense. 30 years ago, a Japanese investor would never have expected that the stock market return would fall short of bond returns over the next 3 decades. The fact that it is the US and not Japan is not really relevant. If it helps, change my wording from "US bonds tanked" to the opposite "bonds return twice as much as equities". There is no difference.
The point was that even relative performance routed in fundamentals may not line up with past performance. Diversity in my mind is our only weapon against this (since we can't truly control time horizon). Alternatively, as pointed out above more exposure to macro economic conditions.

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willthrill81
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Re: past performance

Post by willthrill81 » Tue Mar 05, 2019 6:37 pm

megabad wrote:
Tue Mar 05, 2019 6:32 pm
willthrill81 wrote:
Tue Mar 05, 2019 5:59 pm
If the U.S. bond market tanked, it would almost certainly throw all other nations' financial markets, either directly or indirectly, into a terrible tailspin.
But your statement was exactly the point I was trying to make about Japan in a general sense. 30 years ago, a Japanese investor would never have expected that the stock market return would fall short of bond returns over the next 3 decades. The fact that it is the US and not Japan is not really relevant. If it helps, change my wording from "US bonds tanked" to the opposite "bonds return twice as much as equities".
By "tanked," I was envisioning something like a 50% real loss, which did not happen to Japanese bonds. But I believe that the rest of the world holds a lot more U.S. Treasuries today than they did in Japanese bonds 30 years ago.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

megabad
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Re: past performance

Post by megabad » Tue Mar 05, 2019 6:51 pm

willthrill81 wrote:
Tue Mar 05, 2019 6:37 pm
By "tanked," I was envisioning something like a 50% real loss, which did not happen to Japanese bonds. But I believe that the rest of the world holds a lot more U.S. Treasuries today than they did in Japanese bonds 30 years ago.
Yeah, I mean I mostly agree with you in this specific case but my point was just that the unlikely/unforeseen can happen. If you frame the situation as too extreme it gets a little hard to support (ie. it is possible a meteor hits the earth and kills most of us and the rest are eaten by returning dinosaurs and aliens).

I should have emphasized the exact situation in Japan where a long term bond would have beaten the stock market by a significant margin. This would do great harm to most investors who use modern portfolio theory. Basically if you were coming of age and dumped all your assets into equities, you would face zero real growth for much of your working life. Than, you would revert to bonds close to retirement and, in the case of modern Japan, this would result in a continuing period of near zero real return. I am not saying that the Japanese scenario is necessarily likely (in the US), only that it is possible and I don't think it was foreseen by many or expected to hold for such a longer period.

delamer
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Re: past performance

Post by delamer » Tue Mar 05, 2019 7:39 pm

Understanding the long run correlation between risk and reward is the only aspect of “past performance” that is truly relevant, as shown in this Vanguard chart: https://personal.vanguard.com/us/insigh ... llocations

When you talk about specific issues such as US v. International stocks or whether stocks will outperform corporate bonds by X percentage points, that is when past performance becomes much less predictive of future results.

acegolfer
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Re: past performance

Post by acegolfer » Wed Mar 06, 2019 8:19 am

In economics/finance, there are 2 ways to prove a point:

1. theoretical model using set of assumptions
2. empirical analysis using past data

Often, #1 is hard for average ppl to understand. Hence, #2 is mostly used, especially in BH. (I'm not saying #1 is always right. Instead, one should try to use both methods to comprehend.)

asif408
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Re: past performance

Post by asif408 » Wed Mar 06, 2019 8:57 am

I think the warning about past performance not being an indicator of the future is more of a warning against overconfidence in future expectations based on more recent positive past performance, which is the most common way past performance is incorrectly used and can hurt an investor.

To use two extreme examples, Japan's stock market had a ~20% annualized return from 1970-1990. Anyone in Japan or elsewhere who used that to predict it's stock market performance and loaded up on Japanese stocks since then was severely disappointed. Similarly, in the US in the late 1990s, people were routinely saying in surveys that they expected 20-30% annualized returns from the US stock market. This is not surprising, since from 1985 to March 2000 the US stock market had about a 19% annualized return, and from 1995 to March 2000 had a ~26% annualized return. From March 2000 to September 2011, however, the US stock market had a near 0% return: https://www.portfoliovisualizer.com/bac ... ion1_1=100

What you are hearing around here in the last few years is that, at least since the inception of the Vanguard Total International Stock fund in 1996, it has underperformed the US stock market by about 4%/year annualized. Therefore, international stocks aren't useful for future scenarios because of the last 22 years of performance, along with other justifications explaining why that is true. That is a current way past performance is being misused.

A correct way to use past performance in this case is to say: gee, from 1970 to 1994, EAFE stocks outperformed US stocks by 3% annualized. So there are 2 20+ year periods where foreign stocks (1970-1994) and US stocks (1995-2018) each had several percentage points of outperformance. Therefore, a rational investor would use both extremes to say, why not hold some of each, because I don't know what the next 20+ year will look like. You can argue about the percentages, but at least acknowledge that a mix of both can mitigate or prevent future long-term underperformance, which is most important when you are saving for retirement. IMO, past performance is ok to use if you don't isolate it to the most recent timeframe and use it to create a range of future expectations of stock returns. The problem is most people don't use it that way, hence the warnings around here and on fund prospectuses.

UpperNwGuy
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Re: past performance

Post by UpperNwGuy » Wed Mar 06, 2019 9:01 am

Past performance gets an unjustified bad rap around this board. It is one of the key things I look at in determining my asset allocation and deciding what funds to purchase. I do not, however, consider it to be a guarantee of future performance.

Rus In Urbe
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Re: past performance

Post by Rus In Urbe » Wed Mar 06, 2019 9:04 am

+1000
David Jay
Here is the way I would put it: theory + past performance illuminates [but does not guarantee] the future.
Brilliant, David Jay. Succinct. Sums it all up.


Q: But...but...can't you just hand me a crystal ball? Can't you give me a solid, true, completely reliable plan? Isn't there just one % for an absolutely safe withdrawal? Isn't there just one % number I have to save? Isn't there just one way to guarantee everything?

A: No.
I'd like to live as a poor man with lots of money. ~Pablo Picasso

dbr
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Re: past performance

Post by dbr » Wed Mar 06, 2019 9:10 am

Shem002 wrote:
Tue Mar 05, 2019 4:49 pm
After looking at countless threads on this forum about asset classes and allocation I can't wrap my head around the issue of past performance. Many state on this forum that past performance is no indicator of future performance which I agree to a certain extent but not 100%. When reading through articles supplied by Vanguard, Fidelity, Schwab, etc. about asset classes, allocation, and volatility they generally use past performance as reasoning. Even the three fund portfolio (which I like) must use past performance to set allocation amounts because the US/International equity ratio isn't market weight and is lower than Vanguard, Fidelity, and Schwab's target retirement US/International equity ratios. Please keep in mind I am not trying to be extreme with this question just trying to obtain other individuals view points.
That statement (past performance . . .) is meaningless in the abstract. Everything depends on the context and what one is using the data for. The statement itself is supposed to be a warning not to invest in something today because it did well last year. That should be patently obvious but apparently there is a need to remind people of that. By the same token it is hardly possible to have any understanding of investments at all if we don't consider how they have behaved over time in the past, so that is what we do. Even the fact that one should not invest according to past results can only be established by looking at how past results have behaved. I'm sure there is one of those self-referential logical paradoxes in there.

acegolfer
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Re: past performance

Post by acegolfer » Wed Mar 06, 2019 9:23 am

dbr wrote:
Wed Mar 06, 2019 9:10 am
That statement (past performance . . .) is meaningless in the abstract. Everything depends on the context and what one is using the data for. The statement itself is supposed to be a warning not to invest in something today because it did well last year. That should be patently obvious but apparently there is a need to remind people of that. By the same token it is hardly possible to have any understanding of investments at all if we don't consider how they have behaved over time in the past, so that is what we do. Even the fact that one should not invest according to past results can only be established by looking at how past results have behaved. I'm sure there is one of those self-referential logical paradoxes in there.
Well said. This is why we need to teach statistics to young ppl. Ppl need to understand the concepts of population, sample, expected value, sample average, standard deviation, standard error.

Nowizard
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Re: past performance

Post by Nowizard » Wed Mar 06, 2019 10:42 am

Past performance does predict future performance with index funds, if you allow that you can predict that future performance will closely track stock market returns.

Tim

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willthrill81
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Re: past performance

Post by willthrill81 » Wed Mar 06, 2019 11:10 am

acegolfer wrote:
Wed Mar 06, 2019 9:23 am
dbr wrote:
Wed Mar 06, 2019 9:10 am
That statement (past performance . . .) is meaningless in the abstract. Everything depends on the context and what one is using the data for. The statement itself is supposed to be a warning not to invest in something today because it did well last year. That should be patently obvious but apparently there is a need to remind people of that. By the same token it is hardly possible to have any understanding of investments at all if we don't consider how they have behaved over time in the past, so that is what we do. Even the fact that one should not invest according to past results can only be established by looking at how past results have behaved. I'm sure there is one of those self-referential logical paradoxes in there.
Well said. This is why we need to teach statistics to young ppl. Ppl need to understand the concepts of population, sample, expected value, sample average, standard deviation, standard error.
:thumbsup

I've never understood why we teach algebra and trigonometry in high school but not elementary statistics. I've found the latter to have far more applicability in daily (and business) life than the former two.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

jsprag
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Re: past performance

Post by jsprag » Wed Mar 06, 2019 4:28 pm

Predictive power generally increases as you move from the specific to the general, and from a short time scale to a long.

Movement of a single stock in the span of a few days is a seductive but ruthlessly poor predictor of movement over the next few days.

Past performance of a broad sector over several quarters has some correlative power with the next few quarters, and sometimes with other sectors. Many have tried and failed to turn this into an investing edge.

Performance of entire markets (i.e., US stock market) over the past several decades is our best indicator of where that market is headed over the next several decades, but at best that's in aggregate and of no help in avoiding the downs and leveraging the ups.

If you figure it all out, please PM me with 2020 performance expectations :wink:

dbr
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Re: past performance

Post by dbr » Wed Mar 06, 2019 4:56 pm

jsprag wrote:
Wed Mar 06, 2019 4:28 pm
Predictive power generally increases as you move from the specific to the general, and from a short time scale to a long.

Movement of a single stock in the span of a few days is a seductive but ruthlessly poor predictor of movement over the next few days.

Past performance of a broad sector over several quarters has some correlative power with the next few quarters, and sometimes with other sectors. Many have tried and failed to turn this into an investing edge.

Performance of entire markets (i.e., US stock market) over the past several decades is our best indicator of where that market is headed over the next several decades, but at best that's in aggregate and of no help in avoiding the downs and leveraging the ups.

If you figure it all out, please PM me with 2020 performance expectations :wink:
Excellent. This is kind of the crux of the whole issue -- why people can't take an estimate of future stock market return, bounded by estimation errors of all kinds, to understand why their portfolio lost 3.943% last month.

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willthrill81
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Re: past performance

Post by willthrill81 » Wed Mar 06, 2019 5:05 pm

jsprag wrote:
Wed Mar 06, 2019 4:28 pm
If you figure it all out, please PM me with 2020 performance expectations :wink:
The market will be up or down. That'll only cost you an AUM fee of 1.99%. 8-)
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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tennisplyr
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Re: past performance

Post by tennisplyr » Thu Mar 07, 2019 7:52 am

Past performance DOES guarantee future performance...the market WILL go up and WILL go down, when it will is another issue :confused
Those who move forward with a happy spirit will find that things always work out.

dbr
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Re: past performance

Post by dbr » Thu Mar 07, 2019 8:46 am

tennisplyr wrote:
Thu Mar 07, 2019 7:52 am
Past performance DOES guarantee future performance...the market WILL go up and WILL go down, when it will is another issue :confused
I like that. Actually past performance also tells you when it will go up and when it will go down -- sometime.

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Taylor Larimore
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Past Performance -- What Experts ay

Post by Taylor Larimore » Thu Mar 07, 2019 9:00 am

Bogleheads:

This is what experts say about "Past Performance":
American Association of Individual Investors: "Top Performance lists are dangerous."

Frank Armstrong, financial author: "Rating services such as Morningstar's 'Star Awards' or the 'Forbes Honor Roll' attest to the futility of applying past performance to tomorrow."

Arnott and Bernstein (2002, p. 64): “The investment management industry thrives on the expedient of forecasting the future by extrapolating the past."

Barra Research: "There is no persistence of equity fund performance."

Christine Benz, Morningstar Director of Personal Finance: "When we look at our data, at the factors that are most predictive of good performance going forward, low costs are a much better predictor than is great past performance."

Wm. Bernstein, author of The Four Pillars of Investing: "For the 20 years from 1970 to 1989, the best performing stock assets were Japanese stocks, U.S. small stocks, and gold stocks. These turned out to be the worst performing assets over the next decade."

Jack Bogle: "The biggest mistake investors make is looking backward at performance and thinking it’ll recur in the future."

Bogleheads' Guide to Investing: "Using past performance to pick tomorrow's winning mutual funds is such a bad idea that the government requires a statement similar to this: "Past performance is no guarantee of future performance." Believe it!"

Jack Brennan, former Vanguard CEO: "Fund ranking is meaningless when based primarily on past performance, as most are."

Burns Advisory tracked the performance of Morningstar's five-star rated stock funds beginning January 1, 1999. Of the 248 stock funds, just four still kept that rank after ten years.

Ben Carlson, author of A Wealth of Common Sense : "Dow Jones looked at nearly 2,900 active mutual funds. Only 2 funds in the top quartile stayed in the top quartile of performance over the next four 1-year periods."

Andrew Clarke, author: "By the time an investment reaches the top of the performance tables, there's a good chance that its run is over. The past is not prologue."

Jonathan Clements, author & former Wall Street Journal columnist: "Suppose you picked stock funds that ranked in their category's top 25% over the past five years. A regular updated study suggests that less than a quarter of these funds will remain in the top 25% over the next five years--even worse than the result you would expect based purely on chance."

Prof. John Cochrane, author: "Past performance has almost no information about future performance."

S.T.Coleridge: "History is a lantern over the stern. It shows where you've been but not where you're going"

Dow Jones Indices Report, June 2015: "The data shows a stronger likelihood for the best-performing funds to become the worst performing funds than vice versa." -- June 2016: "Only 3.7% of large-cap funds maintained top-half performance over five-consecutive 12-month periods. For midcap funds, the comparable figure was 5.79%, and for small-cap funds, it was 7.82%."

Charles D. Ellis, author of 16 financial books: "Sadly, investors who rely on performance records are relying on useless data."

Eugene Fama, Nobel Laureate: "Our research on individual mutual funds says that it's impossible to identify true winners on a reliable basis, even if one ignores the costs that active funds impose on investors."

Forbes (2/2/04 issue): "Over the past decade, Morningstar's five-star equity funds have earned an average 5.7% against a 10.3% return for the Wilshire 5000 (Total Stock Market)."

Gensler & Bear, co-authors of The Great Mutual Fund Trap: "Of the fifty top-performing funds in 2000, not a single one appeared on the list in either 1999 or 1998."

Ken Hebner's CGM Focus Fund was the top U.S. equity fund in 2007. In November 2009, it ranked in the bottom 1% of its category.

Mark Hulbert (12-31-2014): "Consider a hypothetical portfolio that each year followed the investment newsletter portfolio that, among the more than 500 tracked by The Hulbert Financial Digest, had the best record during the previous calendar year. Over the past 20 years, that portfolio would have been a disaster, producing an annualized loss of more than -17%."

Mark Hebner, President, Index Fund Advisors: "From 1998 through 2013 only about 8 funds remained in the top 100 the following year."

JPMorgan Chase claimed that 97% of their alternate-asset mutual funds beat their benchmark during the 10-year period ending December, 2013. Morningstar reported that only 33% beat their benchmark during the same period (past-performance calculations differ).

Arthur Levitt, SEC Commissioner: "A mutual fund's past performance, which is the first feature that investors consider when choosing a fund, doesn't predict future performance."

Peter Lynch's Fidelity Magellan Fund (FMAGX), once the world's largest and most successful mutual fund, is now (Feb. 9, 2018) in the bottom 11% of its category for 15-year annualized return

Burton Malkiel, author of the classic Random Walk Down Wall Street: "I have examined the lack of persistency in fund returns over periods from the 1960s through the early 2000s.--There is no persistency to good performance. It is as random as the market."

Mercer Investment Consulting from a study of over 12,000 institutional managers: "Excellent recent performance not only doesn't guarantee future results but generally leads to under-performance in the subsequent period."

Bill Miller, former manager of Legg Mason Value Trust (LMVTX), was the only manager to outperform The S&P 500 Index for 15 consecutive years. On 9/7/2016 Miller’s fund is in the bottom 1% for 15 year returns.

Mark Miller, financial author and journalist: "Only 7.33% of domestic equity funds that were in the top quartile of performance in March 2014 were still there two years later."

Morningstar: "Over the long term, there is no meaningful relationship between past and future fund performance."

Ron Ross, author of The Unbeatable Market: "Extensive studies by Davis, Brown & Groetzman, Ibbotson, Elton et al, all confirmed there is no significant persistence in mutual fund performance. -- Wall Street’s favorite scam is pretending that luck is skill.”

Bill Schultheis, adviser and author of The Coffeehouse Investor: "Using past performance numbers as a method for choosing mutual funds is such a lousy idea that mutual fund companies are required by law to tell you it is a lousy idea."

Sequoia Fund was the top performing large-cap growth fund at the end of 2015 according to Morningstar. On 4/21/2017 it ranked in the bottom 1% for five year returns.

Standard & Poor's Persistence Scorecard (Dec-2014): "The data show a stronger likelihood for the best-performing funds to become the worst-performing funds than vice versa. Of 421 funds that were in the bottom quartile, 14.45% moved to the top quartile over the five year horizon, while 27.08% of the 421 funds that were in the top quartile moved into the bottom quartile during the same period."

Larry Swedroe, author of many finance books: "The 44 Wall Street Fund was the top performing fund over the decade of the 1970s. It ranked as the single worst performing fund of the 1980's losing 73%. -- If you are going to use past performance to predict the future winners, the evidence is strong that your approach is highly likely to fail."

David Swensen, Yale's Chief Investment Officer: "Chasing performance is the biggest mistake investors make. If anything, it is a perverse indicator."

Tweddell & Pierce, co-authors of Winning With Mutual Funds: "Numerous studies have shown that using superior past performance is no better than random selection."

Eric Tyson, author of Mutual Funds for Dummies (2010 edition): "Of the number one top-performing stock and bond funds in each of the last 20 years, a whopping 80% of them subsequently performed worse than the average fund in their peer group over the next 5 to 10 years! Some of these former #1 funds actually went on to become the worst-performing funds in their particular category."

Value Line selected Garret Van Wagoner "Mutual fund Manager of the Year" in 1999. In August 2009, Van Wagoner's Emerging Growth Fund was the worst performing U.S. stock fund over the past 10 years.

Vanguard Study: "Persistence of performance among past winners is no more predictable than a flip of a coin."

Jason Zweig, author and Wall Street Journal columnist: "Buying funds based purely on their past performance is one of the stupidest things an investor can do."
Best wishes
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

Rus In Urbe
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Re: past performance

Post by Rus In Urbe » Thu Mar 07, 2019 9:05 am

THANKS Taylor for assembling this list.

A perfect answer to the question: Can I perfectly predict the future by looking at the past?

Answer: Nope.
I'd like to live as a poor man with lots of money. ~Pablo Picasso

The Wizard
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Re: past performance

Post by The Wizard » Thu Mar 07, 2019 9:14 am

Rus In Urbe wrote:
Thu Mar 07, 2019 9:05 am
THANKS Taylor for assembling this list.

A perfect answer to the question: Can I perfectly predict the future by looking at the past?

Answer: Nope.
Well, there's a huge difference between predicting which managed mutual funds will outperform over the next few years vs predicting how the S&P 500 will perform.
We have our annual contest here for predicting the latter.

As for me, I'm confident in my prediction: the broad stock market will fluctuate in value, with a long-term upward trend...
Attempted new signature...

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Shem002
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Re: Past Performance -- What Experts ay

Post by Shem002 » Thu Mar 07, 2019 9:34 am

Taylor Larimore wrote:
Thu Mar 07, 2019 9:00 am
Bogleheads:

This is what experts say about "Past Performance":
American Association of Individual Investors: "Top Performance lists are dangerous."

Frank Armstrong, financial author: "Rating services such as Morningstar's 'Star Awards' or the 'Forbes Honor Roll' attest to the futility of applying past performance to tomorrow."

Arnott and Bernstein (2002, p. 64): “The investment management industry thrives on the expedient of forecasting the future by extrapolating the past."

Barra Research: "There is no persistence of equity fund performance."

Christine Benz, Morningstar Director of Personal Finance: "When we look at our data, at the factors that are most predictive of good performance going forward, low costs are a much better predictor than is great past performance."

Wm. Bernstein, author of The Four Pillars of Investing: "For the 20 years from 1970 to 1989, the best performing stock assets were Japanese stocks, U.S. small stocks, and gold stocks. These turned out to be the worst performing assets over the next decade."

Jack Bogle: "The biggest mistake investors make is looking backward at performance and thinking it’ll recur in the future."

Bogleheads' Guide to Investing: "Using past performance to pick tomorrow's winning mutual funds is such a bad idea that the government requires a statement similar to this: "Past performance is no guarantee of future performance." Believe it!"

Jack Brennan, former Vanguard CEO: "Fund ranking is meaningless when based primarily on past performance, as most are."

Burns Advisory tracked the performance of Morningstar's five-star rated stock funds beginning January 1, 1999. Of the 248 stock funds, just four still kept that rank after ten years.

Ben Carlson, author of A Wealth of Common Sense : "Dow Jones looked at nearly 2,900 active mutual funds. Only 2 funds in the top quartile stayed in the top quartile of performance over the next four 1-year periods."

Andrew Clarke, author: "By the time an investment reaches the top of the performance tables, there's a good chance that its run is over. The past is not prologue."

Jonathan Clements, author & former Wall Street Journal columnist: "Suppose you picked stock funds that ranked in their category's top 25% over the past five years. A regular updated study suggests that less than a quarter of these funds will remain in the top 25% over the next five years--even worse than the result you would expect based purely on chance."

Prof. John Cochrane, author: "Past performance has almost no information about future performance."

S.T.Coleridge: "History is a lantern over the stern. It shows where you've been but not where you're going"

Dow Jones Indices Report, June 2015: "The data shows a stronger likelihood for the best-performing funds to become the worst performing funds than vice versa." -- June 2016: "Only 3.7% of large-cap funds maintained top-half performance over five-consecutive 12-month periods. For midcap funds, the comparable figure was 5.79%, and for small-cap funds, it was 7.82%."

Charles D. Ellis, author of 16 financial books: "Sadly, investors who rely on performance records are relying on useless data."

Eugene Fama, Nobel Laureate: "Our research on individual mutual funds says that it's impossible to identify true winners on a reliable basis, even if one ignores the costs that active funds impose on investors."

Forbes (2/2/04 issue): "Over the past decade, Morningstar's five-star equity funds have earned an average 5.7% against a 10.3% return for the Wilshire 5000 (Total Stock Market)."

Gensler & Bear, co-authors of The Great Mutual Fund Trap: "Of the fifty top-performing funds in 2000, not a single one appeared on the list in either 1999 or 1998."

Ken Hebner's CGM Focus Fund was the top U.S. equity fund in 2007. In November 2009, it ranked in the bottom 1% of its category.

Mark Hulbert (12-31-2014): "Consider a hypothetical portfolio that each year followed the investment newsletter portfolio that, among the more than 500 tracked by The Hulbert Financial Digest, had the best record during the previous calendar year. Over the past 20 years, that portfolio would have been a disaster, producing an annualized loss of more than -17%."

Mark Hebner, President, Index Fund Advisors: "From 1998 through 2013 only about 8 funds remained in the top 100 the following year."

JPMorgan Chase claimed that 97% of their alternate-asset mutual funds beat their benchmark during the 10-year period ending December, 2013. Morningstar reported that only 33% beat their benchmark during the same period (past-performance calculations differ).

Arthur Levitt, SEC Commissioner: "A mutual fund's past performance, which is the first feature that investors consider when choosing a fund, doesn't predict future performance."

Peter Lynch's Fidelity Magellan Fund (FMAGX), once the world's largest and most successful mutual fund, is now (Feb. 9, 2018) in the bottom 11% of its category for 15-year annualized return

Burton Malkiel, author of the classic Random Walk Down Wall Street: "I have examined the lack of persistency in fund returns over periods from the 1960s through the early 2000s.--There is no persistency to good performance. It is as random as the market."

Mercer Investment Consulting from a study of over 12,000 institutional managers: "Excellent recent performance not only doesn't guarantee future results but generally leads to under-performance in the subsequent period."

Bill Miller, former manager of Legg Mason Value Trust (LMVTX), was the only manager to outperform The S&P 500 Index for 15 consecutive years. On 9/7/2016 Miller’s fund is in the bottom 1% for 15 year returns.

Mark Miller, financial author and journalist: "Only 7.33% of domestic equity funds that were in the top quartile of performance in March 2014 were still there two years later."

Morningstar: "Over the long term, there is no meaningful relationship between past and future fund performance."

Ron Ross, author of The Unbeatable Market: "Extensive studies by Davis, Brown & Groetzman, Ibbotson, Elton et al, all confirmed there is no significant persistence in mutual fund performance. -- Wall Street’s favorite scam is pretending that luck is skill.”

Bill Schultheis, adviser and author of The Coffeehouse Investor: "Using past performance numbers as a method for choosing mutual funds is such a lousy idea that mutual fund companies are required by law to tell you it is a lousy idea."

Sequoia Fund was the top performing large-cap growth fund at the end of 2015 according to Morningstar. On 4/21/2017 it ranked in the bottom 1% for five year returns.

Standard & Poor's Persistence Scorecard (Dec-2014): "The data show a stronger likelihood for the best-performing funds to become the worst-performing funds than vice versa. Of 421 funds that were in the bottom quartile, 14.45% moved to the top quartile over the five year horizon, while 27.08% of the 421 funds that were in the top quartile moved into the bottom quartile during the same period."

Larry Swedroe, author of many finance books: "The 44 Wall Street Fund was the top performing fund over the decade of the 1970s. It ranked as the single worst performing fund of the 1980's losing 73%. -- If you are going to use past performance to predict the future winners, the evidence is strong that your approach is highly likely to fail."

David Swensen, Yale's Chief Investment Officer: "Chasing performance is the biggest mistake investors make. If anything, it is a perverse indicator."

Tweddell & Pierce, co-authors of Winning With Mutual Funds: "Numerous studies have shown that using superior past performance is no better than random selection."

Eric Tyson, author of Mutual Funds for Dummies (2010 edition): "Of the number one top-performing stock and bond funds in each of the last 20 years, a whopping 80% of them subsequently performed worse than the average fund in their peer group over the next 5 to 10 years! Some of these former #1 funds actually went on to become the worst-performing funds in their particular category."

Value Line selected Garret Van Wagoner "Mutual fund Manager of the Year" in 1999. In August 2009, Van Wagoner's Emerging Growth Fund was the worst performing U.S. stock fund over the past 10 years.

Vanguard Study: "Persistence of performance among past winners is no more predictable than a flip of a coin."

Jason Zweig, author and Wall Street Journal columnist: "Buying funds based purely on their past performance is one of the stupidest things an investor can do."
Best wishes
Taylor
Thanks Taylor I think we can all agree about active funds. What I am referring to in my initial post is total market index funds.

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Taylor Larimore
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Re: past performance

Post by Taylor Larimore » Thu Mar 07, 2019 10:03 am

Thanks Taylor I think we can all agree about active funds. What I am referring to in my initial post is total market index funds.
Shem002:

Using past performance to predict future performance is futile for both active funds and total market index funds.

I sponsor an annual Boglehead Contest to demonstrate how difficult it is to predict future performance. Last year most contestants could not even predict the direction of the 2018 stock market whether they used "past performance" or not.

https://www.lostoak.com/ls/diehards/con ... index.html

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

Rus In Urbe
Posts: 532
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Re: past performance

Post by Rus In Urbe » Thu Mar 07, 2019 11:52 am

The Wizard

Rus In Urbe wrote: THANKS Taylor for assembling this list.
A perfect answer to the question: Can I perfectly predict the future by looking at the past?
Answer: Nope.

Well, there's a huge difference between predicting which managed mutual funds will outperform over the next few years vs predicting how the S&P 500 will perform. We have our annual contest here for predicting the latter.
As for me, I'm confident in my prediction: the broad stock market will fluctuate in value, with a long-term upward trend...
Most likely. And likely enough that one can put a bet on it. But it's not guaranteed.

What has happened in the past does not include all the possibilities of what may happen in the future.
I'd like to live as a poor man with lots of money. ~Pablo Picasso

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Shem002
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Re: past performance

Post by Shem002 » Thu Mar 07, 2019 5:02 pm

Taylor Larimore wrote:
Thu Mar 07, 2019 10:03 am
Thanks Taylor I think we can all agree about active funds. What I am referring to in my initial post is total market index funds.
Shem002:

Using past performance to predict future performance is futile for both active funds and total market index funds.

I sponsor an annual Boglehead Contest to demonstrate how difficult it is to predict future performance. Last year most contestants could not even predict the direction of the 2018 stock market whether they used "past performance" or not.

https://www.lostoak.com/ls/diehards/con ... index.html

Best wishes.
Taylor
Taylor, if past performance is futile for total market index funds why would you personally recommend an underweighted 20% international equity allocation and not market weight?

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Taylor Larimore
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Location: Miami FL

Re: past performance

Post by Taylor Larimore » Thu Mar 07, 2019 6:24 pm

Taylor, if past performance is futile for total market index funds why would you personally recommend an underweighted 20% international equity allocation and not market weight?
Shem002:

I explain here:

How Much International Stock? A Suggestion.

Best wishes
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

Topic Author
Shem002
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Re: past performance

Post by Shem002 » Thu Mar 07, 2019 8:48 pm

Taylor Larimore wrote:
Thu Mar 07, 2019 6:24 pm
Taylor, if past performance is futile for total market index funds why would you personally recommend an underweighted 20% international equity allocation and not market weight?
Shem002:

I explain here:

How Much International Stock? A Suggestion.

Best wishes
Taylor
Yes I am familiar with that post, the point I am trying to make is Vanguard used past performance in their research to come up with their recommendation. Saying that past performance is futile doesn’t make sense when that is a key factor in why you recommend 20%

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willthrill81
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Re: past performance

Post by willthrill81 » Fri Mar 08, 2019 12:15 am

Shem002 wrote:
Thu Mar 07, 2019 8:48 pm
Yes I am familiar with that post, the point I am trying to make is Vanguard used past performance in their research to come up with their recommendation. Saying that past performance is futile doesn’t make sense when that is a key factor in why you recommend 20%
Anyone who says that they have completely ignored past performance in formulating their investment strategy is not being honest with you, themselves, or both.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

alex_686
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Re: past performance

Post by alex_686 » Fri Mar 08, 2019 10:04 am

Taylor Larimore wrote:
Thu Mar 07, 2019 6:24 pm
Taylor, if past performance is futile for total market index funds why would you personally recommend an underweighted 20% international equity allocation and not market weight?
Shem002:

I explain here:

How Much International Stock? A Suggestion.

Best wishes
Taylor
So I am on the other side, with a market weight. Let me explain why and put this in the context of past performance.

First, the past is not nearly as clear as you think. There is less data out there than you think - at least to build statistically robust models. Next, there is the problem of the models themselves. I will point to Taylor's link as a example. Correlations are highly sensitive to the time period and frequency you use. 180 days? 36 months? You will get different answer. Next, the answers that the correlation matrix spit out are highly sensitive to the inputs. Small changes in expected returns and correlations will generative very different portfolios. Look at it one way, you get 20%. A different way, 50%. So, evaluating the past is almost more art than science. It is becoming more problematic now that correlations are converging. See below. This is not a knock on Taylor - he has a valid opinion drawn from data. It is just that other people can draw different valid opinions from the same data.

Second, the past may not matter. The past only helps us see the future if the future is like the past. What if it is not? What if the underlying structure changes? Go back 40 years ago and stocks' loading factors were "Regional", "Sector", "World", where Region is North America, Europe, etc. This was even true 20 years ago. This made sense - most companies were smaller and more local back then. Today, not so much. The indexes are now dominated by super-national megacap corporations. The factor loading is now inverse - World, Sector, Regional. If the Regional factor is now solidly in 3rd place, does this past data actually helps us in any way? I mean, we can input the data into the old models and get answers - but do these answers matter? The answer is no, not really. I will point to the increasing correlations between markets. There are edge cases if you are actively managing single stocks.

Once again, to contrast with Taylor, the above idea is a newer idea. Academics and institutional investors are running ahead of the mass market here. The suspected change in economic structure is new, the ability to cheaply investing in international markets is new, there have been relatively few periods of stress for back testing. How much weight do you want to place on this? High level of theory, makes narrative sense, but has a short history? I do, but it is a valid point to debate.

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Re: past performance

Post by bloom2708 » Fri Mar 08, 2019 10:19 am

Shem002 wrote:
Thu Mar 07, 2019 8:48 pm
Yes I am familiar with that post, the point I am trying to make is Vanguard used past performance in their research to come up with their recommendation. Saying that past performance is futile doesn’t make sense when that is a key factor in why you recommend 20%
20% is enough to participate and move the needle.

5% of anything in your portfolio does not do enough to alter your return.

20% is a good floor. Participate. If you want to do 30%, 40%, 50%, 60% based on whatever research, that is fine. Stick with that level. That is the hardest part. If you pick 20 or 25% and stick with it you are participating in the international market.
"People want confirmation, not advice" Unknown | "We are here to provoke thoughtfulness, not agree with you" Unknown | Four words: Whole food, plant based

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Shem002
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Re: past performance

Post by Shem002 » Fri Mar 08, 2019 10:34 am

willthrill81 wrote:
Fri Mar 08, 2019 12:15 am
Shem002 wrote:
Thu Mar 07, 2019 8:48 pm
Yes I am familiar with that post, the point I am trying to make is Vanguard used past performance in their research to come up with their recommendation. Saying that past performance is futile doesn’t make sense when that is a key factor in why you recommend 20%
Anyone who says that they have completely ignored past performance in formulating their investment strategy is not being honest with you, themselves, or both.
That is what I was thinking as well. I guess some don't see it that way though.

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