"TAMRIS" - Setting standards

Independent, Impartial, Objective




Relying on past performance is as effective as closing the barn door after the horse has bolted!

The past performance of an investment should never be taken as a guide to the type of returns you could expect in the future.  At times, even the historical returns that are quoted as being available from the different asset classes should not in truth be taken as guidance for the future.

Inflation, economic cycles, market valuations, yields and risks "today" are all different.

More importantly, it is short term performance from here on in, that is performance over the next 5, 10 and 15 years, that has the greatest bearing on financial security for those that depend on their assets to meet financial needs. In this context long term historical returns can actually be irrelevant.

The only way your advisor can assess future returns and the risks to these returns is by being able to value the present, a skill which most in the industry do not possess.

The basic fact is this; the average investment, fixed interest or stock market, only has a limited capacity to produce return over time. Simply put, above average increases in the price of stock market investments are more likely than not to be followed by below average rises in price, or even falls.

Think of it as someone running a marathon.  If you run too fast over part of the race you are going to slow down over another section. You only have so much energy to expend over the course of the race.

As a general rule

  • The further an investment has risen in price the less likely it will be able to repeat that performance and the more likely that future returns will be lower. There is no rule that says “buy high sell low”? 

    • By buying a highly valued investment all you are doing is providing the opportunity for someone else to sell at a profit.

  • If anything, you should really be buying when returns have been poor and an investment is undervalued.  Hence one of the primary investment rules, buy low sell high.

    • As such, if you are looking at a transaction, strong positive past share price performance is not necessarily the best guide to future performance.

  • Individuals that sell a product based on past performance are more likely to be product salesman than professional advisors. 

    • Why would a professional advisor pander to your weaker, baser and irrational instinct to buy high? 

  • Most mutual fund and product marketing focuses on performance periods which put the investment being sold in the best light. 

    • Without advice, most investors would avoid under performing assets and it only takes a little push to get individuals to buy the current high flyers.  

    Are you a dedicated follower of fashion?


If you are being sold a product on the back of strong past performance, discount this figure immediately in making your decision and ask your advisor why the investment is likely to produce this performance from this point on.

  • Whenever you are shown past performance as an incitement to invest, ask the advisor how the starting period of the comparison compares to the current point in time.  If the start of the period was a recession and the bottom of the stock market and the end was a boom and a market peak, then you have problems.

  • Ask them the type of returns that have historically been achieved from current valuations and the current point of the economic cycle or the business cycle of the specific investment.   Indeed, whenever you are being quoted a specific achievable return or a past performance, ask this question.

If the advisor cannot answer these questions, then you be cannot be assured that this is a good investment for you.  

Indeed, many products are introduced on the basis of past performance and it is one of the more obvious conflicts of interest within the industry. Advisors who are remunerated by commission are more likely to push flavour of the month products where the performance is in the price while disciplined managers are more than likely to avoid them.

A professional firm that has valuation expertise and the ability to properly construct, plan and manage portfolios will pay attention to the underlying fundamentals of the investment (valuation) as opposed to the past performance.   

There are reasons why past performance has become so important in the selling process.

  • It takes little or no expertise to plug past performance and expectations of gain make the transaction more appealing to the investor.

  • Most products and mutual funds require a reasonable amount of investment expertise to select, to allocate and to manage. Performance can be easily illustrated and requires little expertise to work out which has produced the best performance.


Performance information is helpful though.

Performance is helpful in that it provides a basis for comparing like investments with like investments and it is also helpful in assessing inconsistencies between a manager's stated investment style and that of the fund or portfolio.  But this type of analysis requires expertise which only the most diligent of of advisors would possess.

It is also useful in providing an assessment of the risk of the manager’s strategy relative to other similar managers and the effectiveness of their discipline in their stated area of expertise. 

But, the bottom line, and the most important step in selecting any investment, is first and foremost valuation which, assess both the potential for return and the risks to return. Only once you know the valuation of an investment can you decide how much you want to invest in it and this has nothing to do with past performance.

Indeed, if your advisors is a disciplined asset allocator, as managers, including those who use mutual funds and ETFs should be, he or she should first of all identify the the areas of the market/world markets they want to be in via a fundamental valuation analysis.   This analysis would tell them what they want to buy and how much.  This is what is called a valuation, allocation and management framework.

They would then select the managers based on whether or not their style and the composition of their funds matched the valuation and allocation parameters you wanted within their portfolios.

Performance would be only one of a number of ways of differentiating managers.

Professionals who allocate to investment vehicles by this method would not have to trawl through the 1,000s of funds available. A disciplined process would only need to focus on a handful of funds for each component of the portfolio. For the amateur asset allocator, the only way to differentiate between the thousands of funds available is by a analysing performance.

Selecting funds based on performance alone is wholly impractical.

Performance analysis

The other time when performance is important is for reporting on the performance of a portfolio.

It is a moot point that the industry is quick to point out past performance to smooth a sale but digs in its heels when it comes to mandatory justification of the performance of investments recommended for a client. Ask your advisor about this if you do not get a performance analysis.

Hallmarks of a professional

One of the hallmarks of a professional is that they will resist the temptation to sell their services through the development of false expectations.  Indeed it will be impossible for them to do their job by relying solely on performance. This makes the initial job harder.

Relying on past performance figures to generate client acceptance of a recommendation is the hallmark of a transaction driven sales process as opposed to a service driven advice process.

Portfolio rationale

If indeed your advisor is properly constructing, planning and managing your portfolio they will have a specific asset allocation that they consider matches your needs and risk preferences given the risks and returns available in the market place.

They will select investments based on their own valuation and risk analysis and when discussing the rationale for their inclusion will focus mainly on the valuation rationale as well as the benefits to the portfolio as a whole. 

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Steer clear of those whose main rationale is performance and not valuation of risk and return.Text Box: