“Past performance is not indicative of future results.”
Most people think of investing when they hear or read the sentence above, the ultimate statement of caution. What do you think of this statement when it comes to baseball? Post-season is upon us, and the top six Major League teams, based upon winning percentage during the 2023 regular season, combined for 1 measly win during the first rounds of the playoffs. All six were early exits from a World Series pursuit. That is painful for their fanbases, myself included, having grown up an Atlanta Braves follower. The Braves had a historically great team this year, putting up statistics never before seen in the game’s 150+ years. My elation and confidence in a march to the championship was at an all time high. However, this year’s regular-season performance would not be indicative of October’s results.
As always, sports provide a good, timely and painful parallel to the world of investing, in this instance, a subtle reminder to not rely upon the past when predicting the future. Since 1969, when baseball transitioned to more of a divisional format, the team with the best regular season record won the World Series a mere 15 times. That’s a 28% success rate or, said another way, a 72% failure rate. It’s wild to think that, 72% of the time, the best doesn’t end up being the best, but rather, a significant disappointment. Every fall, your best bet would be to put your money on the field rather than the “likely” winner. The most appropriate expectation for you, as a fan of the best team, is that they won’t win the World Series. It seems strange but then, maybe you’ll be only mildly disappointed should they lose and pleasantly surprised if they win!
How does this logic work when it comes to investments? Odds appear to be even less in favor of the best performers. According to a study conducted by Dimensional Fund Advisors (dimensional.com) over a 20 year stretch (2003-22), equity mutual funds that were in the top quartile during any five year stretch fell out of that top grouping 78% of the time over the following 5 years.
Resist Chasing Past Performance
In the same vein, consider another graphic below from Dimensional that shows the success (or failure!) of publicly traded companies after climbing into the top 10. …
Past performance is not indicative of future results. Avoid relying on what have been the single best performers, but rather spread your resources across the market and increase your probability of success. Use a broad array of low cost mutual funds and ETFs to capture asset class returns while eliminating concentrated risk.
As for Braves fans, just wait until next year. (Sorry, Cubs fans, I know that’s your line.) Stay diversified my friends.