As an investor, you have a lot of factors to consider when you’re choosing an investment adviser: their experience, their philosophy, their reputation, their fees, etc. But one of the factors advisors commonly advertise is one you should ignore completely: their past returns.
It’s kind of an open secret that no adviser or analyst has a crystal ball. We’ve stated many times in this blog and our podcast to beware of advisers making strong predictions about the future. Most have pretty lousy track records when we look back at their predictions a year or two later. But perhaps more dangerous to your investing success than a random prediction about the future is the advisor who touts their previous triumphs as evidence they will perform just as well or better going forward. There’s a reason the regulators require the phrase “past performance is not a guarantee of future results” on every one of those line graphs in sales literature; it’s because past performance is never a predictor of future returns.
As an investor, we urge you to beware of the “look at my history” sales pitch. It’s the basis of nearly every Ponzi scheme (along with a guaranteed rate of return far above what is realistic), and is so notoriously abused, regulators have specific rules in place about any advertisements showing past investment performance.
Specifically, watch out for:
1) Guarantees much above 3%. Risk and reward are always parallel to each other. The potential for more of one, by necessity, means the more potential for the other. Anyone promising a rate of return deserves scrutiny; anyone promising rates of return much above the rate of inflation deserves serious skepticism.
2) Cherry-picked dates in past performance. Whenever possible, if you are looking at an investment’s past return, look as far back as possible. Ignore one or three-year predictions, and be especially wary of strange start and stop dates on the charts (like May 1st to April 30th).
Here’s why: if we showed you this graph as proof of our investment performance, it looks great (it’s not an investment we specifically use or endorse , by the way – these charts are just an example of losing objectivity by cherry-picking dates):
Here’s the problem: it’s not an objective look. We cherry-picked the dates to give us a start near a market low, and an end near a market high. If we step back and look at the same investment for 2 full calendar years, it looks a little different:
And even more so stepping back 5 years:
The point is this: investing will always have ups and downs, and much of that is out of the control of any adviser. Our job is to learn enough about you to help you invest in the right mix of things, so that over time, you will reach the average rate of return you needed to reach your goals. But by-and-large, the roller coaster ride along the way will be out of everyone’s control.
At nVest Advisors, we do not advertise investment returns or performance, and we never will. It’s not because we’re ashamed of the results we get for our clients – far from it. It’s because how we performed last year, or the last 3 years, or 5 years, has no bearing whatsoever on the investing world today. Three years ago, no one could have predicted Brexit or a President Trump (indeed, even the night both of these historic votes occurred, most “experts” were still dead wrong on the outcome), or the tragic terror attacks across Europe. Five years ago, no one could forecast the drop in oil company stocks or how long the Fed would delay raising interest rates. We don’t invest your money making predictions about specific future events. We invest your money with the understanding that unexpected things will happen. That’s a big difference.
We also find past returns useless because every investor is different, and our models and custom portfolios must reflect that. If the S&P 500 is up 20% in a particular year – so what? Unless you were invested exactly in the S&P for exactly that time frame, your results will be different. There is no specific rate of return an all-stock portfolio should get compared to a 50/50 stock and bond portfolio. The composition of investments, the timing of each purchase and sale, the number of dividends and interest payments, and much more, affect the total return over time. It’s not the advisor’s job to beat every market scenario (and no advisor ever will, long-term). It’s our job to guide you to your goals as we shepherd your investments to accomplish what you need them to accomplish. Whether that requires 11% a year or 3% a year, or anything in between, is an individual determination.
So as you shop for a financial advisor or investment manager, do your due diligence. Investigate their past as a professional (not their past returns). Get in front of them and assess their investing methods and philosophies. Make sure they are a good “fit” for your needs, and that you’ll enjoy a long relationship with them. And know ahead of time, the road won’t always be smooth on your way to your goals.
Are you looking for an investment adviser? We encourage you to see the nVest Advisors difference for yourself. Call us today at 1-888-852-0702, or schedule a no-cost, no-obligation appointment today!