
Anytime I look at the average investment returns quoted for a managed investment, I am always re- minded of the old joke about a doctor, a dentist and a statistician on a hunting trip. After spotting a large deer in the distance, the doctor takes aim, fires but misses. His shot was 5 meters to the left of the deer.
Consequently, the dentist takes aim and his bullet misses as well, but this time it is 5 meters to the right of the deer. The statistician, seeing both shots, puts his rifle down, and proclaims, “Good shooting gentleman, we got him”!
Yes I know, lame, but it does serve the purpose to illustrate how statistics can be incredibly misleading with the information they portray. And none more misleading than within the investment com- munity and their portrayal of investment returns.
An average is a wonderful mathematical formula and can at times be used as a reasonable guide to investment performance.
But being mathematically derived does not mean it should be relied upon. Here’s why. Within the funds’ management industry, investment returns are normally calculated at 1, 3, 5 or 10-year intervals. But, statistics being statistics they can have their integrity questioned as a result of ‘one- off’ events occurring within the calculation period. This effectively skews them forever in the direction influenced by whatever event has occurred.
A good example of this was the election of Donald Trump to the Presidency of the United States. Initially, investment markets were shocked at his surprise win and they began to tumble quicker than you could say, Will Robinson. But just 24 hours later, markets began to see his election as a positive to US productivity, triggering a market rally taking the Dow Jones index into record territory.
But at the time, Trump had not even entered office so he was unable to make any tangible contribution other than his rhetoric. But the subsequent rallies, fuelled by nothing more than perception, are captured within performance figures calculated at the end of the calendar year.
And it is these figures that will be adorning the advertising efforts of investment funds in order to persuade further investment. So if Trump fails to deliver on promises made, whilst in office, markets will fall like a brick. Thus leaving investors, who may have been persuaded by ‘fluffed’ up returns, battling with the reality of markets.

Now I know that investment fund advertisements all carry the ‘infamous’ asterisk next to any quoted returns, directing the reader to a disclaimer. This ubiquitous disclaimer usually suggests that ‘past performance is no indication of future returns.”
So what then is the use of these past returns so prominently displayed if they can’t actually be relied on? You guessed right, just bait to lure investors. Unfortunately, people do base their investment decisions on these past performances. And are doing so under the misapprehension that the quoted returns are regularly achievable. Unfortunately for them, they soon come to realize the error in their thinking. A very good recent example of a fund failing miserably to live up to its past performance is from the UK from a fund called Woodford Equity Income
But as you can imagine, prospective investors certainly don’t want to see advertisements proclaiming “Invest now, we have had 3 years of negative returns” or ‘come celebrate our 5th year of below average performance”. They want to see a strong, positive performance before placing any funds.
Sadly the concepts of marketing have well and truly overtaken the concepts of investing in the funds’ management industry. And in my opinion, this has been the major contributor to a huge amount of ‘wealth’ destruction and not; natural disasters, geopolitical crisis or economic factors, all of which do rock investment markets. No, none of these, rather it has just been the actions of attracting the wrong people into the wrong investments.

So do these investment returns serve any purpose?
When you are examining any managed or superannuation fund the critical factor you need to establish is, what is going to happen in the future? Past performance figures can provide an investor with a bit of a guide to the future.
For example, if a particular fund achieved a return of 12% in the past. And there have been no not- able changes to either investment conditions or the fund’s investment personnel; then there is a likelihood of similar returns to come.
The problems occur if conditions have changed.
Investment returns and Investment conditions
There is never a guarantee of smooth sailing with any investment. Economic, geopolitical or natural disasters strike at any time and will send shockwaves through markets. And when they happen, and they do regularly, you can kiss good buy any consistency of returns. So if we are transitioning between economic conditions, with forecasts of deterioration, then any past returns are going to be useless.
Investment returns and Investment personnel
Fund managers are like any other employers. People come, and people go. Don’t be fooled by particular funds boasting of their tried and tested investment systems. Success in the funds’ management industry is usually always because of an individual’s ability.
Take that individual out of the equation, and you immediately lose your investment consistency. So keep your eye on staff moves within a fund manager. I can assure you, it is always big news when high profile ‘stock pickers’ leave an organization. Keep watch in the financial press.
So, if you decide to rely on past investment returns when making your investment decisions, just make sure nothing has materially altered since achieving those returns. If nothing has changed, then you could expect similar to come. Of course, there are absolutely no guarantees.
As always, the best advice is to regularly monitor your investments on an ongoing basis, and make changes where necessary. Proactive investment action is by far, more profitable than reactive actions.
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