Are previous results an accurate way to track stocks, mutual funds, etfs?

Question

I am conducting some research, looking to get into my first non-cd investments. When looking at the history of funds, is looking at the ones with the best 1,3, and 5 year returns a reliable way to go? I mean you can look at some ETFs and see a 30-45% return in the last year. Obviously there is no guarantee that history will repeat, but in general, is a good place to start by looking at the return rates?

If not, how else might I start to limit the seemingly endless number of funds?

Thanks for any help

Answer 1

History establishes a trend and gives cues as to how the market HAD dealt with the company in regard to things that went on. It does not directly bear on the future any more than if the previous coin toss were heads. As in the coin, there is still a 50-50 chance on either heads or tails (although I have had a few land on edge, they eventually fell one way or the other). What the market DID (past tense) does not require the market to do it again.

Still, check for major events and trends. Does your stock tend to go up when the Dow goes up? Or may be it goes the other way (as in folks would rather buy a popular blue chip than buy this company when they are in a buying mood)? Or is there any common correlation (often not)? Is your stock seasonal? My first purchases were for an air conditioning manufacturer, so I bought when it was cheap, Winter, and sold when it was higher, early to mid-Summer. If your company, say, made hot chocolate, it would have a different season than it it, say, sold snow cones. Has your company done a lot of ups and downs but within a fairly steady corridor? Then there are reasons why the market may have established a ceiling and a floor, so ferret out some ideas for those price supports or resistance. Similarly, if you can discern other characteristics that frequently happen, you've just been handed an opportunity to improve your odds--if your coin tosses have never gone more than one side four times in a row, for instance, I would bet for the other side, even if the actual odds for that specific toss were still only 50-50. If your stock tends to peak in January, April, and August, then look at your calendar and time your purchases, or sales, with that in mind, even if you haven't figured out the common causes. History, therefore, gives hints and clues. The market, however, doesn't have to bow to history. In that you are on your own.

Still, there is another important history. It involves comparative advantages. Does your company tend to make more profits than its peers? Does your company tend to make more profits more consistently than its peers? Does your company look like it will continue to perform this way? (If not, then look more closely at its peers) Profitability tends to win out over hope and hype in the long run, so look at its history of doing business, and let the market do whatever it wants.

The first is trading. The latter is investing. What are you really wanting to do?

Answer 2

Absolute returns are not really relevant, making 30% last year was a doddle for most but instead look at how it perfromed against its class of investments. If it was upper quartile for the 1, 3, 5 and 10 years then it will be a good bet. Be aware though that ETF's are totally at the whim of the market and, depending on your timeframe for investment now is a great or terrible time to enter the market. It becomes a better idea the longer you want to hold the money there.

If you are looking at managed funds then history is again no better really as some traders use a strategy that has either underperformed or overperformed due mainly to the market profile over recent quarters. Trying to find the manager who is set up the best to benefit longterm is the perenial search we are all on. My best advice is to not set your expectations too high for a huge return, look for competative management rates and fees but don't shop in the basement on that criteria and hold for the long term. Keep your eye on the performance but a minimum of 5 years is required to get through down years. If after 5 years your selected investment is still underperforming then think about making a switch.

Summary. Decide if you want the money managed (higher fees but theoretically better performance) or just to go with the flow. Understand that money needs to be locked away and forgotten about for a long period. Select on relative past perfomance and total returns AFTER fees. There's no way around it, it takes a lot of research.

As an aside, if you can get a good one recommended to you an INDEPENDANT (really independant) Financial Advisor will be a useful ally. I have to say that in my humble opinion most of them are just as bad as realtors and totally low quality but a good one stands out a mile. Look to pay them for their time not by commision on what you buy would be my suggestion but it will depend on how much you can invest as to whether that is a cost effective decision.

Good luck.

Answer 3

I am attempting to answer your question in an Indian context although the concept of mutual fund is same in US and in India or worldwide.

As a Certified Mutual Fund Advisor, We have certain codes of conducts that we have to adhered to. In which we are adviced not to advice people on the basis of Past Performance of the Fund. Past Performance is no gurantee to the future returns. Because Markets may not behave same way every year. One or three year is very short period to check the performance. The longer the period the more accurate the result as the fund is time tested after a considerable period of time.

However, Past performance is the evaluation of the skills and performance of the fund manager. If the fund has performed well in the past as compared to other funds in the same category, it may be prefered over the other fund provided everything is being equal.

Besides performance, there are many other things that should be taken into account while evaluating the fund like consistency of performance, frequency of dividends, expense ratios etc. Fund managers's skills and experience, Performance of other schemes managed by the fund manager as well as the same fund house, performance of the other scheme of same objectives etc..

This also applies to stocks as well.