“Tune Out the Noise”: Why Short-Term Results Can Be Misleading


If you’ve ever read an investment research article, a mutual fund prospectus, or almost anything related to the financial markets, you’ve probably run across the phrase, “Past performance is no guarantee of future results.” Want to know why you see these words so often? Because they’re true. While most of us certainly draw on previous experiences in order to make decisions about future courses of action, it’s vital to remember that, in the world of investing, the past is not a perfect mirror for what the future will be.

A good example of this is the comparative performance of different mutual funds, even when they’re in the same investment category. Many variables can cause two different funds—even when they hold the same types of assets—to have differing rates of return as measured over a short period. Something as technical as the precise timing of fund rebalancing, for example, can produce widely varying results over the short term, even if the two funds demonstrate very similar returns over the long haul.

Consider the following chart, exhibiting the different monthly rates of return on an identical portfolio of small-capitalization stocks:

SOURCE: Dimensional Fund Advisors. Past performance, including simulated performance, is no guarantee of future results; indexes are not available for direct investment.


The only difference in these simulated funds is the month in which the holdings were rebalanced in order to stay within the parameters of the fund’s investment policy. And yet, the monthly rate of return varies from a low of 1.46% (17.52% annualized) to a high of 1.57% (18.84% annualized), depending on which month the rebalancing was executed.

Why would the rates be so different? Simply because the individual price movements of the various stocks making up the portfolio are inherently unpredictable in the short term. If the fund was rebalanced when a particular stock was riding high because of a favorable earnings report, that has implications for the fund’s performance. If, on the other hand, rebalancing occurred just after the announcement of a disappointing product launch, that will have implications, as well. And the fact is that no fund manager can predict, with perfect accuracy, which stocks in the portfolio will be up or down at any given moment.

This is just one illustration of why investors should not allow themselves to be distracted by the short-term “noise” around any investment. A financial publication may tout the outstanding performance of a particular fund, and you may think, “Why didn’t my fund do that well last month? It’s got the same holdings as the one in the news story.” But your focus should remain firmly fixed on the long-term view. Rather than chasing the latest “star,” investors will generally achieve better results, over time, by sticking with their long-term strategy and allowing the markets to work in their favor—as the markets have done for the majority of the time over the decades.

As a fiduciary wealth manager, Empyrion Wealth Management seeks to provide authoritative, research-backed information, so that clients can make solid decisions for their investments and other important financial undertakings. To learn more about “tuning out the noise” and other important principles of successful investing, click here to read our whitepaper, “The Informed Investor.”


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Empyrion Wealth Management (“Empyrion”) is an investment advisor registered with the U.S. Securities and Exchange Commission under the Investment Advisers Act of 1940. Information pertaining to Empyrion’s advisory operations, services and fees is set forth in Empyrion’s current Form ADV Part 2A brochure, copies of which are available upon request at no cost or at www.adviserinfo.sec.gov. The views expressed by the author are the author’s alone and do not necessarily represent the views of Empyrion. The information contained in any third-party resource cited herein is not owned or controlled by Empyrion, and Empyrion does not guarantee the accuracy or reliability of any information that may be found in such resources. Links to any third-party resource are provided as a courtesy for reference only and are not intended to be, and do not act as, an endorsement by Empyrion of the third party or any of its content. The standard information provided in this blog is for general purposes only and should not be construed as, or used as a substitute for, financial, investment or other professional advice. If you have questions regarding your financial situation, you should consult your financial planner or investment advisor.

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