Why you shouldn’t invest based on past performance

When it comes to investing, one of the most common disclaimers is: “Past performance is not indicative of future results.”

But what does it mean? And why it’s so important?

In short, while historical returns can offer insights, relying solely on them for investment decisions is a risky approach. Here’s why.

The danger of recency bias

Recency bias is the tendency to place too much weight on recent events, assuming they’ll continue indefinitely. For example, the average aggressive KiwiSaver fund generated a return of 21.6% over the year to September 2024¹, 8.3% over 5 years to September 2024, and 9.1% over a 10-year period. Despite 10 years being a relatively long period, we would be cautious about using a figure of 9.1% when modelling KiwiSaver returns from an aggressive fund. The risk of clients’ funds falling short of projections is just too high.

Markets can shift rapidly, and what’s booming today may face headwinds (literally) tomorrow. 

Historical performance is in the past 

Markets are complex. They’re influenced by a multitude of unpredictable factors, intertwined at different degrees.

When we look at historical market performance, we know it reflects past market conditions – but these conditions often don’t last. For example, the economic environment during the 2010s was driven by globalisation, low inflation, low and declining interest rates, and aggressive central bank quantitative easing programs which stimulated investment. These factors created a boom for many investments, with equities, bonds, and even collectibles experiencing dramatic price increases.

However, today’s market is a lot different, and it keeps changing at a fast pace. We’re now living in a world shaped by de-globalisation (regionalisation), growing divides between nations and within nations, post-COVID disruptions, lingering inflationary pressures, and higher interest rates. Add to that geopolitical tensions, like wars in Europe and the Middle East, and it’s clear why markets have become more volatile. Inflationary pressures, driven by trade barriers, global supply disruptions, and global warming, further complicate the investment outlook.

It’s important to adapt investment strategies to the ‘here and now’, accepting that the conditions driving past growth may not return.

How to mitigate risks in your portfolio

To mitigate risks, a diversified investment approach is critical. Putting all your eggs in one basket—like a single sector or stock—can lead to significant losses if market conditions change. Instead, spread your investments across asset classes, industries, and regions to reduce exposure to any single risk.

Thorough research is equally important, and that’s why we’re here. We can help you understand the current market fundamentals and assess whether an investment aligns with your goals and risk tolerance. Working with an Invest Link adviser is all about making informed choices.

We will work with you to help you set realistic goals and design a plan tailored to those goals. Our role is to select a suitable portfolio for your goals, ensure that you understand what you are invested in, undertake analysis to help ensure your investments meet your goals, and provide oversight of your investments.

We have a number of clients we are helping to manage their savings during retirement.

Importantly, we are always here to check in with you and answer any questions you may have.

Like to talk?

If you’d like to discuss your unique circumstances, get in touch. We can help you craft an investment plan that works for your needs and goals.

Disclaimer: The information provided in this article is intended for general informational purposes only and does not constitute financial advice. Every individual’s financial situation is unique, and financial decisions should be made based on your specific circumstances and goals. We recommend consulting with a qualified financial adviser before making any investment, insurance, or mortgage-related decisions. Mortgage Link, Insurance Link, Invest Link, and FG Link are part of the Link Financial Group, offering tailored advice and services to help you achieve your financial goals.