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Past Performance and the Movies

Ghostbusters.  Arthur.  Carrie.  The Magnificent Seven.  The Karate Kid.  Ben Hur.  Point Break.  Red Dawn. Poltergeist.  Have you guessed what all of these have in common?  Yes, they are all movies.  They are also movies that have been remade.  The Magnificent Seven has yet to be released, so the jury is still out on it, however, the others have all been considered lesser quality than the original.  I am never really sure what goes through someone’s mind when they are remaking a classic movie.  Do they expect it to be better or are they simply trying to make some easy money?  It seems these remakes should all include the official investment disclaimer that “past performance is not indicative of future results.”


I guess I shouldn’t be too surprised that moviegoers will drop $10 or so to see a remake of a movie from years ago with the hope it will be at least as good as the original.  I mean, it was good back then so it has to be at least that good now, right?   This same train of thought permeates through the world of investing especially as it applies to mutual funds.  The difference between these movies and mutual funds is at least the funds warn you they may not do as well in the future as they did in the past.  I sure wish I had such a warning when I watched the remake of Poltergeist.


Investors typically flock to the funds that have the best performance in the past.  The thinking is sound that if a fund has done well in the past it is bound to do well in the future.  Unfortunately, the data does not bear this belief out.  An analyst, Aye Soe, of Standard and Poor’s looked at the performance of nearly 700 domestic mutual funds.  Of the funds that were in the top quartile in March of 2014 only 7.3% were still in this top quartile two years later.  Let me rephrase that – 92.7% of funds failed to deliver performance in the top 25% of their peer group two years later!


If you extended this out to make the mark a little bigger by wondering how many were still in the top half two years later, well, the returns are not much better.  Only 27.4% were still in the top half two years later.  So, lowering the bar really did not improve much of anything.


Breaking the data down even more, the percentages of staying in the top quarter decreased as you moved from large to mid to small cap funds.  Their respective percentages were 8.5, 3.26, and 0.68.  The final percentage amazes me as the small cap space is where the “experts” always say having an active manager makes all the difference.


When Soe analyzed the data to see how the funds did over a five-year period of time the results were even worse, which I guess is to be expected.  The 92.7% number I referenced for the two-year time period jumped to 99.7% when the timeline was increased to five years.  Not sure what else to say, but uggghhhhh.


What have we learned?  Well, it is tough for mutual funds to stay top performing year after year.  We have also learned those disclaimers about past performance and future performance are dead on.  You will also learn right now that if someone ever tries to remake The Breakfast Club I will absolutely lose my mind!  Or, to quote Mr. Vernon, “Don’t mess with the bull, young man.  You’ll get the horns.”

About Dan Johnson, CFP

I am the President and CCO of Forward Thinking Wealth Management, LLC, which is the flat-fee financial planning firm located in Akron, OH, and set up to work virtually with clients across the country. I charge clients a flat fee of $4,800 regardless of asset size. My firm is a solution to what I feel is a broken system where clients pay advisors based on something out of their control - the performance of the market.
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