Ignore Past Performance

Rob Carrick wrote an article in this weekend’s Globe & Mail titled “Seeking the hottest of the hot-charging funds.” The title alone makes me never want to read through the business section of the Globe & Mail again. If headlines like this don’t sound like nails on a blackboard to you, then you need to ask yourself why it doesn’t.

The first paragraph reads: “Today’s goal will be to find funds that have jumped ahead of their peers and stayed there for longest. The hottest of the hot funds, if you will.” To what end? There must be some purpose or else why do it? If there is one, it is never mentioned in the short article. In the print article, there is some fine-print on the right-hand side that says “Remember, past results guarantee absolutely nothing about the future.” In the online article that text is a bit more prominent and appears before the list of hot funds rather than after. So because past results guarantee absolutely nothing about the future (not just nothing, but absolutely nothing), there doesn’t seem to be any purpose to this article other than as a historical account of the performance of some random funds. However, I can’t help wondering how many people read that article, joted down some of the funds, and on Monday will buy those funds, with some expectation of similar return. After all, Rob Carrick didn’t just choose the funds that have performed the best in some period, he’s “looking for consistent top returns, so let’s zero in on the funds that nailed a top five-star rating for the most months consecutively.” I think people are even more willing to fall into the trap of going for funds that have performed “consistently well”, even more so than funds that have just “performed well in the past.” The way the article is written (besides the disclaimer), to the lay reader, I don’t see how it is anything other than a recommendation of these funds.

To top it off, the longest return period that is given is the 5-year return. This takes us back to 2002 when the current bull market started. I dunno, I sort of feel a sense of deja-vu here. It feels like 1999-2000, when a list of the “hottest of the hot-charging funds” would include a bunch of technology funds (now replaced with precious metals funds apparently). A couple years later they would appear on lists of the worst performing funds.

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