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If you look at just about any investment related material you’re likely see the same words written in some manner:

“PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RETURNS”

Yet, every day we see people judging someone’s performance, validating concepts and evaluating future potential performance by looking at past performance. We see very active managers citing the success of their past performance. And we even see index fund advocates citing past performance to validate their future returns. Who is right? Who is wrong?

Strange, isn’t it? How the most commonly cited statistic in this industry is almost always past performance. Yet it is also the one we are supposed to view with the most skepticism. It all makes you wonder if there isn’t a lot more to analyzing fund managers, various strategies and macro methodologies than just glancing at past returns. I certainly think that past performance only scratches the surface on what makes a particular approach relevant. I presume I am not the only one. But we should be more careful about simply citing past returns to validate someone’s future potential. There’s a lot more to the story than that….

Source: The Most Ignored (And Common) Term In Portfolio Analysis