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I want to grow my capital by investing in funds (e.g. exchange-traded funds, mutual funds). However, I always see this disclaimer: "past performance does not indicate future performance" (or similar).

How am I supposed to evaluate a fund if the past performance of the fund is meaningless?

If it is true that "past performance does not indicate future performance", then why do fund companies bother to publish the past performance of their funds?

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    It's not completely meaningless. It's just not a guarantee of continued performance. Growth stock funds will typically have better long term performance than e.g. bond funds. That doesn't mean that you will necessarily have better performance with a growth stock fund over any given short term time horizon.
    – Daniel
    Jul 26 at 15:08
  • The same could be said about the sun. Just because it rose in the East yesterday doesn't guarantee that it will tomorrow but there's a high probability... It's up to you to decide what you think that probability is.
    – 0xFEE1DEAD
    Jul 26 at 21:58
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    @0xFEE1DEAD it's really quite different from the sun.
    – Daniel
    Jul 26 at 22:16
  • There are many criteria on which to base an investment decision, part performance is but only one and not necessarily any more inaccurate than any other. Jul 26 at 22:45
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    @0xFEE1DEAD I don't think it's an appropriate analogy. The rising and setting of the sun is entirely predictable and well-established. The entire point of this disclaimer is to warn the consumer that ETFs are not like the sun. There's no chance that the sun won't rise tomorrow. It's impossible for that to happen. It's entirely possible that something fundamental could change in the economy such that what we currently think of as "growth stocks" will perform worse than bonds. And it's almost certain that a high performing fund manager will have a bad year every so often.
    – Daniel
    Jul 27 at 23:41
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past performance does not indicate future performance

Yes, obvious statement is obvious.

Pretend for a moment that we applied this statement to Olympic gold medalists. The statement is not needed because if past performance guaranteed future performance then why hold the Olympics?


why do fund companies bother to publish the past performance of their funds?

If a fund increased by 300% in the past year then I want to know about it.

That fund is either heavily vested in a hot market which I think can climb higher or it has peaked and I should avoid it at all costs.

Likewise if a fund has lost 80% of it's value then I would research why so that I can determine if it is a bargain or if it will never recover.


Imagine being presented with a fund for $24 per share. Without further context, tell me is this a good or bad deal?

How am I supposed to evaluate a fund if the past performance of the fund is meaningless?

For starters you look at the investment contents of the fund and research the companies to make decisions as to whether you think they will be worth more in the future.

Gamblers buy stocks/funds based solely on price.

Investors make their decisions based on company data.

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I always see this disclaimer: "past performance does not indicate future performance"

How am I supposed to evaluate a fund if the past performance of the fund is meaningless?

"does not indicate" does not mean "meaningless". Thus, your fundamental premise is flawed.

(The SEC-mandated disclaimer is so that brokerages don't get sued by investors when they lose money during a recession or bubble-collapse.)

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    In fact this wording of the disclaimer is flat-out incorrect. The factually-correct wording (which may or may not comply with current SEC requirements) is "Past performance is no GUARANTEE of future results".
    – Ben Voigt
    Jul 26 at 21:26
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The disclaimer has to be there by law. Just because a fund went up by 10% last year, it doesn't mean it will this year. It could even go down.

Look at what's included in the fund. Is it the mix of investments you want your money in? Look at the charges, are they reasonable, when compared with others? Are there any weird features, such as a fund that's guaranteed not to go down, but if it goes up, the managers keep 50% of the profits for themselves (yes, I have seen a fund advertised that works like that)?

And compare the fund you're interested with others in the same market segment, going back several years. Does this fund grow faster (or shrink slower in a bad year) compared with the others?

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The requirement to include those words are because the government wants investors to see the warning.

The past performance is included because the government wants to standardize how the performance data is presented.

So how to you decide when the warning tells you to ignore past performance? That is why the general advice is that most investors can focus on a passive fund following a broad index. Chasing the fund that was hot last week, last month, last quarter, or last year is just chasing the hot hand. The next period might not be so good. Also the reverse is true. There is/was a method of focusing on last years dogs of the Dow when picking stocks for this year. There was no guarantee that would consistently work.

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This is a great argument for low-cost index funds, in my opinion. The one thing you do know that probably won't change drastically is expense ratio. So figure out what type of assets you want to own and find a highly diversified index fund that holds them with the lowest expense ratio you can find (don't get carried away though; within a few basis points is fine).

As to your other question, I think fund companies publish past performance because they're required to, despite the disclaimer. And of course, if the performance is good they will heavily tout it.

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  • Past performance is about more than absolute performance: it establishes a track record that is comparable against other funds and their benchmark (tracking error)
    – 0xFEE1DEAD
    Jul 27 at 1:29

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