Why Past Performance Really Doesn't Predict Future Results
The quiet problem most investors miss
Every investment advertisement carries the same warning: "Past performance is not indicative of future results." Investors see this so often they've stopped reading it. It feels like meaningless legal protection, not useful information.
But it's actually the most important sentence in the advertisement. Decades of research confirm that past investment performance has almost no power to predict future investment performance. Yet investors keep selecting funds based on historical returns, as if the disclaimer didn't exist.
How this actually works
Studies examining fund performance consistently find:
No persistence above chance. Funds that outperformed in one period are not more likely to outperform in the next. The correlation between past and future performance is essentially zero.
Regression to the mean. Top-performing funds tend to perform worse in subsequent periods. Bottom performers tend to improve. Extreme performance in either direction tends to moderate over time.
Different periods, different winners. The funds that topped the charts in 2010-2015 are mostly different from those that topped 2015-2020, which are mostly different from 2020-2025 leaders. There's no stable set of "good" funds.
The math of luck. In any given period, some funds will beat the market by random chance. These funds attract attention and money—then revert to average performance, disappointing the investors who chased their returns.
If past performance predicted future results, you'd expect to see the same funds consistently outperforming. Instead, leadership rotates with no discernible pattern.
Where people get this wrong
Assuming top performers have skill. After a fund beats the market for three years, it feels like the manager must be doing something right. But the evidence suggests it's mostly luck—skill that can't be reliably identified in advance.
Cherry-picking time periods. Any fund can find some time period where it outperformed. Marketing materials highlight favorable windows and downplay unfavorable ones.
Confusing asset class returns with fund returns. Sometimes a fund outperforms because its asset class outperformed (e.g., tech stocks in a tech boom). That's not fund manager skill—it's being in the right place at the right time.
Ignoring the role of fees. High fees are the one reliable predictor of underperformance. Expensive funds consistently do worse than cheap funds, on average—unlike past returns, which predict nothing.
What to focus on instead
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Look at costs, not returns. Low expense ratios are the best predictor of future relative performance. Choose cheap funds over formerly successful expensive ones.
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Diversify rather than select. Instead of trying to pick winning funds, own broad market index funds that capture the entire market return minus minimal costs.
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Extend your time horizon. Over 20-30 years, the overwhelming driver of returns is your asset allocation and time in market, not which specific funds you chose.
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Be skeptical of star managers. Yesterday's investing genius is often tomorrow's disappointment. The skills that drove past success rarely persist.
How this connects to long-term outcomes
The compulsion to chase past performance is one of the most expensive mistakes investors make. They buy funds after strong runs (at higher prices) and sell funds after poor runs (at lower prices)—the opposite of what would serve them.
If you select funds based on recent performance, you're essentially selecting based on noise. You'd do just as well picking randomly—and considerably better if you just chose the lowest-cost options.
The disclaimer exists because it's true. Past performance genuinely doesn't predict future results. The sooner investors internalize this, the sooner they can stop chasing returns and start building wealth in ways that actually work.
The best predictor of future performance isn't what a fund did last decade. It's what the fund charges every year going forward.