Need A Money Manager? Don't Get Blinded By Past Performance

Any investor is familiar with the disclosure “past performance is no guarantee of future success.” However, A Wealth of Common Sense’s Ben Carlson believes chasing money managers with strong past performance can be a costly mistake.

“I just think far too many people in the finance industry overestimate the role of skill and underestimate the role of luck on their results,” Carlson wrote.

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Managers who have been exceptionally lucky in the short term will likely regress to market performance in the long term, meaning that their investors are likely in for periods of underperformance in the future.

He warns that many managers who have outperformed the market in recent years have been chasing fads, a strategy that will come back to haunt them in the future.

“Past performance without context can be useless because the investment style, market environment and assets under management when that performance was earned are all very important factors, especially if it was created over a relatively short period of time,” Carlson explained.

He noted outperformance also often leads to overconfidence, which makes money managers more vulnerable to mistakes in the future.

“Performance is often confused with process, which is the only thing that matter going forward,” he concluded.