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Some investors that actively follow the news keep an eye on hot assets, from stocks and cryptocurrencies to funds and indices. They label groups of investment products that have been performing well, and then they tend to project that these assets will continue to rise in value or bring stable future returns. That is a fallacy.
In reality, products that have been showing good results can still do well next year, but this may not be a guarantee or the only factor influencing the price forecast. Investment returns describe what happened under specific conditions, not what will happen in the future. Markets, managers, trends, and economic frameworks can change.
Below we explain why past performance is not a promise, whether strong results may persist, how performance can be laid out selectively, and what else is important.
What the Past-Performance Warning Actually Means
The famous warning quote that past performance does not guarantee future results was codified in rules by the SEC. The US Securities and Exchange Commission requires mutual funds to tell investors that historical investment returns do not necessarily repeat every year.
The Commission explains: a mutual fund that has good profitability this year is not automatically going to be next year’s top performer. It’s normal when the fund performance is above average for one year and mediocre or below average for the next one. The SEC recommends looking at more than the historical performance when making decisions. You should take into account fees, taxes, turnover rates, risks, volatility, and more.
In the EU, the widely cited warning is also applicable, and the phrase “Past performance does not predict future returns” must be displayed prominently whenever investment firms share marketing or client information. It’s a requirement tied to MiFID II Delegated Regulation and ESMA guidelines.
Why Strong Results May Not Persist
It’s not advisable to let a manager handle your money just because of their performance over the past few months or to buy shares because their prices have been rising all year. Instead, it’s better to evaluate investments in terms of probabilities and embrace uncertainty, because strong results may not persist. The reasons for that include:
- Valuations, rates, risk, and liquidity change;
- Costs, fees, taxes, and turnover change;
- Market cycles influence which assets and strategies work;
- Fund managers get promoted, change strategies, and resign;
- Investors can be biased and ignore contradictory evidence;
- Success attracts inflows, so traders open more positions and trade in large volumes.
Financial markets are unstable, and luck plays a big role here. In liquid markets, prices significantly depend on actions of market participants and information they know. Any lucrative trading model is often shared and copied, which reduces its profitability.
Can Any Part of Performance Persist?
There are cases where some investment asset expense ratios, load fees, transaction costs, and core characteristics persisted. The fund manager’s stock-picking method may remain unchanged. Also, risk exposures like market, size, and momentum risks are quite stable.
However, the headline profitability or yields do not stay 100% the same. Consider historical investment returns inherently unreliable as a predictor. Alpha is variable and horizon-dependent. Although research shows that some predictability exists at shorter horizons, it fades over longer periods.
The Impact of Changing Conditions
Market conditions are constantly changing, turning winning strategies into losing ones. There are many things that can go wrong and disrupt your price and performance forecast:
- Central banks can raise interest rates, reducing profits and lowering stock valuations;
- Inflation may grow, decreasing the return on deposits and fixed-income investments;
- Economic slowdowns can occur, decreasing profitability and investor risk appetites;
- Monetary and fiscal policy and asset regulation principles may change;
- Military or trade conflicts and restrictions can alter currency values and expectations of market participants.
The Role of Mean Reversion
Extreme outperformance is frequently random, and great results are likely to be followed by more average ones. If an investment product is unusually strong over a period, then in the next periods, its performance is more ordinary or weak. Of course, it can remain strong, but even partial persistence is probabilistic.
Optimism, competition, arbitrage trends, and market booms or busts seem to be temporary. Studies report that equities demonstrate short-term momentum but long-term mean reversion (about 1–2 years). Mean reversion happens due to investor overreaction, cyclical fundamentals, and statistical inevitability.
How Fund Performance Can Be Presented Selectively
Besides the fact that past performance is not indicative of future results, it can also be deceptive. This is not to say that funds cheat or publish false figures, but they have marketing tricks that allow them to lawfully enhance the results. So, you can’t trust the stats and should know that the funds can use favorable dates, miss some benchmarks, run improper backtests, and share cherry-picked holdings.
Time Period and Benchmarks
A manager can advertise great figures of fund performance because they chose an inception or “since” date that starts at a market bottom or just before a big rally while ignoring earlier periods with losses. Annualized returns can also hide the drawdowns and recovery time. This makes future returns more attractive. Alternatively, marketers can compare products to an irrelevant index so that their figures look better. They can omit the benchmark entirely so there’s no context, which is why it’s recommended to find the missing data on the web.
Survivorship Bias
Survivor bias makes an investor analyze only entities that are still listed or operating. If you do not account for closed funds, mergers, and liquidations, you are likely to have overstated returns, understated investment risk, higher volatility. You can easily see the portfolio showing +100% growth since only surviving assets are considered, although in fact it has grown by +5% due to failed or delisted products.
Poor Backtests
In poorly configured backtesting, an algorithm doesn’t enforce point-in-time audits and allows investing in assets that were not available at that time, or it ignores the return at delisting or the liquidation value. As a result, investors see the unrealistic outcome of a strategy, and the average fund performance is inflated.
Cherry-Picked Holdings and Short-Term Wins
Another trick marketers use is to present investors with a few of the most effective stocks or trades as a portfolio, ignoring the rest. They can also cover recent months or one successful year without showing long-term results or how the trading approach behaves in different modes. This makes the strategy look more profitable than the entire portfolio actually is.
The Gap Between Headline and Investor Returns
Apart from the fact that past performance does not guarantee future results, it also doesn’t reflect what investors have actually received. Headline returns are often gross, nominal, and pre-tax, while what investors keep is net, after-tax. Gross performance chasing is illogical, as all management, custody, fees, and administrative and trading costs will be deducted. Tax outcomes depend on the product type and individual circumstances; for example, there are crypto taxes that may require current local guidance to be paid correctly.
What Historical Data Can Still Tell You
There’s the difference between “not guaranteed performance” and “not informative at all.” It is not without reason that regulators require funds, platforms, and issuers to disclose information about investment products and their price movements. Historical performance data may be useful for analytics, because you don't actually have any other relevant information. With price charts, you can:
- Estimate standard deviation and consistency of returns;
- Measure drawdowns and worst-case scenarios;
- See recovery periods and asset performance under different conditions;
- Learn about correlations between assets or product types, and more.
A Better Way to Read a Historical Performance Chart
Since past performance is not indicative of future results, you can use charts not for forecasts but to get answers to other crucial questions. Each element that contributes to historical performance and investment returns can change the story.
A Practical Fund Comparison Scenario
Our Venga expert has prepared a nice illustrative example that shows why the highest recent return is not a complete decision criterion. Here’s what he recommends regarding the comparison of two equity funds. Assume that two funds target European large-cap stocks. All the numbers are hypothetical.
On the surface, Fund A looks like the clear winner because of the higher recent return. But if you dive deeper, you’ll notice that:
- The difference in fees is 1.2%, so in the long run, the lower cost of the Fund B gives it an advantage;
- A deeper drawdown of Fund A (−35% vs. −22%) implies higher volatility and potentially more painful consequences for investors;
- The 3-year history of Fund A may cover only part of the cycle, while the 10-year history of Fund B covers more, providing more evidence of how the strategy works.
What Else You Should Review
Before relying on the historical performance chart, it is advisable to review such elements of the fund or product documentation as investment objective, strategy and portfolio risk, costs, liquidity, diversification, and legal documents or terms and conditions.
This should help you create a balanced portfolio with promising assets that meets your needs. This won’t eliminate all the investment risks or guarantee profitability, but at least it will help you avoid performance chasing.
Why Crypto Performance Histories Need Extra Context
For cryptocurrency investors, the list of things to check looks a bit different. Besides time period, specific benchmark, gas fees, and project roadmaps, you should pay attention to exchange or trading platform liquidity, token supply, market structure, and custody. Stablecoins, altcoins, derivatives, and lending protocols behave differently, so trading them requires skills and extra attention.
Use Past Performance as Context, Not a Forecast
Historical investment returns are not used for forecasting future returns, but they can tell you how volatile an asset was, how severe and prolonged its biggest losses were, and how assets behaved relative to the benchmark. However, price charts will not be able to answer your questions about how much profit you will receive next year, whether a highly effective fund will remain as is, and whether the old strategy will work well.
For an objective assessment, just the past performance is not enough. You need to dig deeper and find out a sufficiently long and relevant period, an appropriate benchmark, and clear information about risks and costs, as well as embrace the uncertainty that comes with the changing market conditions. Learn more about this in our guide on how to create a solid portfolio.
Disclaimer: The content provided in this article is for educational and informational purposes only and should not be considered financial or investment advice. Interacting with blockchain, crypto assets, and Web3 applications involves risks, including the potential loss of funds. Venga encourages readers to conduct thorough research and understand the risks before engaging with any crypto assets or blockchain technologies. For more details, please refer to our terms of service.