Ignore financial health warning at your peril
The evidence shows that lower-cost funds have a higher success rate
Not all legally obtainable products are necessarily good for us, which is why some come with a warning. “Smoking kills,” it says on cigarette packs, “Enjoy responsibly,” reminds the liquor trade, and “Winners know when to stop,” is the caveat from the gambling industry. And then there is the caution from the investment industry: “Past performance does not indicate future returns.” Most people take the first three warnings to heart, because the risks are obvious and well documented. But the last tends to be discounted, much like the rare side effects of your prescribed medication. The industry’s clients do so at their peril. This financial health warning is necessary not just because future market returns are unknown, but also because the performance of individual fund managers is erratic, and "performance persistence" is low. “Performance persistence” — the ability to consistently deliver an above-average return — is the main justification for choosing expensive active management, b...
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