Don't Fall Into the Past-Performance Trap

Patrick R. McDowell, CFP®, AIF® was quoted in a US News & World Report article by Rebecca Lake discussing how to avoid falling into past-performance traps. 

Past performance is just one piece of the puzzle when evaluating investments. Understanding how performance fits in with your overall investing strategy – and what else should be considered – can keep you from developing tunnel vision.

It's future performance that counts. If you’re investing long term, your perspective should reflect that. Look ahead, rather than backward, says Patrick McDowell, a certified financial planner and accredited investment fiduciary with Arbor Wealth Management in Miramar Beach, Florida. “Most financial reports represent the past, but almost all of the value of a business is in the future.”

The difficult part of investing, he says, is trying to bridge the gap between what’s happened and what lies ahead. That entails asking the right questions. Investors often aim for the same rate of return that an investment has delivered in the past. Instead they should consider why the company earned such high returns in the past, and how likely it is that those same factors will continue enabling the business to outperform.