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Why I Don’t Look at “Performance History” In Mutual Funds

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Here’s the funny thing about writing a personal finance blog for 8+ years – you can easily unintentionally start “plagiarizing” yourself (without the deceptive part). I read this article on Reuters (it’s dated February 2012) and was going to title this post “Past returns are not indicative of future results” (an homage to the little disclaimer at the bottom of every investment document) when I realized that I already wrote a post with that title!

As it turns out, any three year return number is going to look insanely good. The Vanguard Total Stock Market Index Fund (which I own some) is going to be up 30% annually from March 6, 2009. Looking at it today, it’s been tempered a bit – only up 13.86%. Back when Reuters did the article, if you were to look at it six months earlier, the 3 year trailing performance is just 0.91%. That’s a huge difference.

It’s why I rarely look at performance history. It’s also important to note that I usually buy index funds (or total market funds) and so really I just want the fund’s performance to match the index. I know that as the index changes the fund will lag (even given announcements) so it won’t match perfectly. I just want it to be pretty close.

Do you look at performance history and does it play a role in your decision making?

{ 10 comments, please add your thoughts now! }

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10 Responses to “Why I Don’t Look at “Performance History” In Mutual Funds”

  1. jim says:

    If you are buying only index funds, you don’t need to be concerned with past performance. I only buy managed funds bacause a good manager can beat the indexes, so it is necessary for me to take a good look at past performance and management changes.

  2. I stick with funds composed of index funds and so it doesn’t matter much to me as long as they are indeed close in line with the index I am trying to match. Instead I make sure the asset allocation matches what I want.

  3. Thanks for tagging this article, good information for those that wonder after taking FPU- Dave Ramsey still contends that people should buy mutual funds that have consistently earned 12% going back 5,10,15 and 20 years and longer- doing better than indexes. I recall seeing a report once done that showed that picking those funds researched liked that often more than not disappoint. I like his course, but not sure about this investment advise. Either way, getting away from short-term results in important for investors to do.

  4. Jim M says:

    Only do index funds here – so I never have to look at past performance.

  5. The number to look at is not how well they did, but whether they did better than the S&P 500. So few of them do that what Jim and Lance says emerges as the best policy: stick with index funds. Warren Buffett said so and who am I to argue with him? :)

  6. Dave Brown says:

    This is ultimately why you are choosing a mutual fund over an ETF; however, the history is most often misleading unless you understand the duration of the current Portfolio Manager.

    Ultimately there is a survivorship bias as the track record of underperforming funds is “wiped clear” because the manufacturer will often merge uncompetitive products to create more economically scalable products and to optimize marketability.

  7. JP Adams says:

    Thanks for your post Jim. So what is your decision criteria?

    You mentioned that your focus is on index funds and ensuring that their returns match the market.

    What else do you look at?
    - Fees?
    - Stability of the organization providing it?
    - Diversification among index funds?

  8. JP Adams says:

    For anyone looking for some insights on the questions I listed above I did some further research on Jim’s site and found these posts on the topic of index funds and investing:

    http://tinyurl.com/8mwd2wo

    http://tinyurl.com/8qp27yx

    http://tinyurl.com/8eb4fuj

  9. rick says:

    Yes, but I look back past three years. The five year deal is the worst at this point, because it includes 2008. Key are the ten-year and life- time performance histories. With Fidelity’s consumer staples and new market income mutual funds, I have gained 14.5%, so much better than the interest in a savings account in the bank.


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