If you’ve been trading futures, commodities or forex for any amount of time, chances are you’ve heard the phrase “past performance is not necessarily indicative of (or no guarantee of) future results.” It is a government mandated statement that is required for groups involved in certain trading activities. And as you’ll see, it is required for very good reasons, and to answer the headline question – no, past performance does NOT predict future results.
This warning statement/disclaimer is mandatory in many situations because most people look at a historical performance record or equity curve, and extrapolate the results into the future. For example, if an investment made 40% average per year for the last 5 years, many people will assume it will make 40% for the next five years – or at least for the next 1-2 years. That is the absolute WORST thing to assume, for two reasons. First, the future is never a repeat of the past, and second, the historical record itself might be flawed. Both of these problems are discussed below.
Even though it is obvious that no one can predict the future, people always do. This happens in all walks of life, and shows up in such diverse activities as weather forecasting, fortune telling, sports championship predictions and stock market calls. Although it is fun to predict the future, no one really can with any accuracy (although many will claim they have that “gift” – if they really have this ability, how come they are not multi-billionaires?).
So, a typical way to predict the future is to use the past as a guide. For example, the Pittsburgh Steelers won the Super Bowl last year, so based on past performance, they should win it all this year. Or, maybe in late 2007 you thought that since the “buy and hold” method for stocks worked from 1910-2007, it should work in 2008 and beyond. See the problem? Knowing the past doesn’t necessarily help us with the future. Many times it blinds us to other possibilities, which many people found out during the 2008 financial crisis. And that’s one reason for the government warning.
A second reason for the “past performance is no guarantee” disclaimer is that, especially in the investment world, the performance curves and figures that are shown are many times hypothetical (meaning, no one actually traded that way with real money, and possibly no one even COULD have traded that way, even if they wanted to), or developed with the benefit of hindsight (improper “backtesting” is a good example). Therefore, the performance you are looking at might have absolutely ZERO relevance going forward.
So, how can you protect yourself? First, if you see someone making market predictions, realize that there is a good chance they will be wrong. No matter who the guru is, take any prediction with a grain of salt. No one truly knows the future.
Second, investment track records are nice to look at, but never assume that the past performance shown will be repeated. It rarely is. However, a track record, especially if it is audited by an independent third party, may help give you confidence that the people running the investment know what they are doing. That is certainly better than putting your money with someone who has no track record. But again, it is no guarantee of performance going forward.
Third, for any track record you see, ask if it was produced in a real money account. If it wasn’t, it still might be a viable investment strategy, but treat it with healthy skepticism. It might be a pie-in-the-sky trading method that is impossible to achieve in real life. Or, if it was produced with hindsight, it is almost a guaranteed loser going forward.
Finally, make sure you perform due diligence before buying any system, following any guru or signing up for any signal service. It is your money, and you worked extremely hard to accumulate it. Don’t throw it away on a snap decision. Take the time and the effort to research and investigate every investment opportunity in detail. If you rush and fall for the best sales pitch, soon enough you’ll learn why there is the required warning “past performance is no guarantee of future results.”
