The Bogleheads' Guide to Investing, 2nd Edition

Chapter Thirteen Performance Chasing and Market Timing Are Hazardous to Your Wealth

Don’t gamble; take all your savings and buy some good stock and hold it till it goes up, then sell it. If it don’t go up, don’t buy it.

—Will Rogers

PAST PERFORMANCE DOES NOT PREDICT FUTURE PERFORMANCE

According to an Investment Company Institute study, about 75 percent of all mutual fund investors mistakenly use short-term past performance as their primary reason for buying a specific fund. It doesn’t take a rocket scientist to figure out why. The financial media consistently churn out favorable stories about recent winning funds, implying that the fund’s managers have some sort of special insight that makes them so successful. Since investors are continually bombarded with these stories about top-performing funds in nearly every financial publication they read, they feel that’s the criteria they should use in selecting their mutual funds. Little do they realize that this is simply the hot fund-of-the-month club, and that the performance figures are usually for cherry-picked funds over carefully selected favorable periods of time.

In addition to mutual fund manager “puff” articles, nearly all the leading newspaper and magazines contain lists of funds showing mutual fund past performance. No wonder the uninformed investor assumes past performance is the best way to pick mutual funds—just pick an “A” ranked fund or a five-star fund.

Index funds, by their very nature, are seldom top performers ...