More often than not, when I have a “first” meeting with a potential client they will ask me the following question, “What have your investments returned in the past?” Now this is an interesting question on several levels. First of all, that presumes that whatever return you earned and will now share with them is likely to be repeated when they invest in it. Let us all now turn to page one of our hymnal (prospectus) and join me in the gospel … “PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS.” Can I get an amen?
You all know that in every investment product you have ever purchased, those words are in big bold print, but yet you choose to ignore them. Why do you ignore them? I’ll tell you why: cause if you can’t judge your future outcomes on past outcomes, then what is left? How do we know what our returns are likely to be? For the last time — YOU DON’T! While I’m the last guy to share a lot of love for regulatory bodies, they don’t make companies print that disclaimer because it’s not true — it is 100 percent true. Past performance is almost never repeatable.
When you go to your local brokers and they pull out a brochure touting some really awesome rate of return, there are two questions you should ask: 1. What would you say is the likelihood this investment will earn the same return next year? 2. Can you please show me some of the accounts you have that held that investment last year? You ask number one because if they say anything other than, “It is not likely,” then they are either incompetent or lying. (Neither one is optimal for anyone you are considering giving a large chunk of dough to.) You ask number two because some (not all) brokers have a habit of looking up the products with last year’s highest returns on them — and sharing them as if the strategy they are now shoving in front of you is one they have always used and not a cherry-picking sales strategy many in the brokerage business are so fond of.
To further dissuade you from hitching your future wagon to yesterday’s horses, let’s consider the S&P 500, the most used index for investors when trying to gauge overall market performance. The S&P 500 for the ten years ending December 2014 earned on average 8.55 percent. Not bad, eh? So now I will ask you a question: how many times do you think over the last 10 years the S&P 500 actually earned 8.55 percent? You guessed it — NONE. The closest it ever came was in 2007 at 9.13 percent. Other years included negative 37 percent (2008) and 32 percent (2013).
I know what you’re thinking. “That’s a really great story, wise guy. How exactly am I supposed to determine what to put money into?” Stand by for the boring, all-too-often repeated financial advisor cliché: Put your money into a well-thought-out, long-term strategy that gives you enough risk — and only enough risk — to put you in a position to earn the rate of return you have thoughtfully calculated you need. For the last time, stop buying things because of what they did and spend more time controlling what you do. Discipline, budgeting and thoughtful planning are the blocking and tackling of investment success, and no shiny brochure with unrepeatable numbers on it is gonna save you from yourself.
“You’ve got to be very careful if you don’t know where you are going, because you might not get there.” — Yogi Berra
I’ll see you dancing on the drive,
This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Scott Brown and not necessarily those of RJFS or Raymond James. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investors’ results will vary.