Stocktake: Warnings about past performance don’t work

Warning that past performance is no guarantee of future performance doesn’t stop investors buying into expensive funds. In fact, it may make investors even more likely to chase performance.

A new study, published in the Journal of Experimental Psychology: Applied, tested disclaimers about past performance on 1,600 people in the US. Participants could choose between one low-fee and one high-fee fund, repeatedly, for 60 rounds of the experiment. In each round, participants saw the funds’ performance over the previous month.

The standard US disclaimer that “past performance does not guarantee future results” didn’t help, as participants “persistently chased past performance”. In fact, less financially literate participants were more likely to choose the high-fee fund after viewing the disclaimer.

In Ireland, it’s common for disclaimers to state past performance is “not a reliable guide to future performance” or that it’s “no indication of future performance” – surely preferable to the US line that there is “no guarantee”, which arguably makes it sound like there is in fact a correlation between past and future performance, albeit an imperfect one.

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Nevertheless, the study suggests all such disclaimers are too weak. Firstly, the “allure” of identifying a profitable pattern is likely “too great to be dispelled by a simple disclaimer stating that there are no patterns”.

Secondly, standard disclaimers don’t provide an alternative cue to guide decisions. “Guided instructions” which identify winning strategies – for example, “funds with low fees have the highest future results” – are a better idea.