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Robin Powell: When choosing a fund to invest in, most people tend to focus on how a fund has performed in the past. The fact is that a fund’s past performance tells us very little about its likely future performance.
Indeed, funds with a good short-term track record — in other words, those you’re likely to read about in the media — are often just the funds to avoid.
Jeffrey Ptak is the Global Director of Manager Research at Morningstar.
Jeffrey Ptak: Whether we’re talking about the media or the investing public, they tend to attach quite a bit of significance to past performance. The question is whether that’s a prudent thing to do and I think the evidence suggests that it’s not. And, why is that?
It’s because past performance tends to be mean-reverting. And so, what we tend to pay attention to, what attracts notice - in the media and more popularly amongst investors - is which has done well. And, which has done well, tends to revert lower. And so that’s the paradox that we face as investors. It is things that tend to speak to us the most, that signal to us the most, to which we are likeliest to succumb to impulse, are probably the likeliest to mislead us because they revert lower over time.
Robin Powell: So, if a fund’s past performance is a poor predictor of future performance, what factors should we be paying attention to? Morningstar’s research constantly shows that a far more accurate gauge is how much a fund costs.
Jeffrey Ptak: We have five elements of the research that we conduct
It has to be priced competitively because one of the things that we’ve
Robin Powell: The bottom line is that identifying, in advance, an actively managed fund that will outperform the market over the long term is extremely difficult.
Choosing a low-cost index fund that tracks the whole market will give you a much better chance of