The real meaning of past performance

Financial Education by Community Manager - No comments

Investment companies have to disclaim always that past performances do not guarantee future returns. This sentence may sound very logic, but we have to underline its importance. Let’s explain it with an example:Performance evolution

This is the evolution of a big British bank in the last five years. As you can see, the stock has been very volatile, because there are several ups and downs in this time frame. If an investment company would have recommended the share in July 2013, their customers had lost a great amount of money, because the stock has not reached that peak anymore.

That is why investors must be cautious and remember that past performances do not mean that the future can be so nice (or so terrible) as before. Back to the chart, the share is now very bullish and has registered a very positive evolution since the spring. However, everything can change.

Anyone can then request: when is it the right moment to invest? Financial analysts make efforts to try to clear it up, but nobody has a crystal ball. It is typical that journalists write about the best assets of the month or of the year, but they are always speaking about the past. Investors should not misunderstand the meaning of that news as good chances to invest immediately.

That is why, if somebody decides to invest, he or she should take into account:

  • Assets are volatile: the price changes continuously and that is part of the system.
  • Past performances are only past: they do not mean a steady positive or negative trend for the future.
  • Investors have to analyse their risk tolerance to know themselves and avoid a volatility that make them suffer from their money.

Last but not least, every investment company have to underline the famous disclaimer: “Investing in securities involves risk and may result in loss. Past performance is not a reliable indicator of future performance. Any historical returns and probability projections may not reflect any future performance”. Do not forget it, it’s about your money.

 

Source of the chart: T-Advisor

Tags: Performance, Risk tolerance, volatility,

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