How Historical Returns Inform Investment Decisions Despite Their Limits
Summary
The document asks why investors are shown historical price and fund-return data if past performance does not guarantee future results. The responses offer several uses: assessing a manager's record relative to a benchmark, examining consistency or hit rates, and supplying historical observations for risk and portfolio analysis. Historical data can therefore inform an evaluation without guaranteeing what prices will do next.
The discussion also cautions against reading trends into price charts when returns are unpredictable, and notes that structural breaks or jumps can make older observations less relevant. One answer invokes the Efficient Market Hypothesis, but the exchange does not establish a formal model or provide empirical evidence supporting its claims. Historical performance is best treated as context for assessing skill and estimating risk, with attention to benchmark choice, statistical uncertainty, and changes in market conditions.
Key ideas
- Historical returns can help assess a manager's record relative to a benchmark, but they do not guarantee future performance.
- Consistency and the frequency of benchmark outperformance are proposed as possible signals of manager skill.
- Historical observations also support risk and portfolio analysis beyond forecasting price direction.
- Structural breaks and jumps can weaken the relevance of past data, and apparent chart patterns may reflect how investors interpret them.
Tags
Full text
# If historical returns are no indication of future returns, why are they still shown to investors? # If historical returns are no indication of future returns, why are they still shown to investors? Stock returns and fund returns are on average not autocorrelated and thus unpredictable. Consequently, looking at a historical price chart gives no indication in which direction tomorrows price will move. Howevery, looking at price paths, investors can be fooled to see trends or patterns through framing effects. Thus, I wonder, what the use is of showing investors price charts? ## Answer by nimbus3000 (score 1) https://quant.stackexchange.com/a/46401 I think it also shows the pedigree of the fund manager. All else equal, if the fund manager could beat the index by 2%, that says something non-zero ## Answer by user41259 (score 0) https://quant.stackexchange.com/a/45892 They say historical returns are no indication of guaranteed future profits for liability reasons so companies cover their asses. ## Answer by Dhruv Mahajan (score 0) https://quant.stackexchange.com/a/46400 Because consistency in returns can be a measure of fund manager's skill, the guy who'll manage your hard earned savings. That is why you should check something called "hit rates", which is the probability of outperforming benchmark. It is should be significantly greater than 50%, showing manager's skill and consistency. ## Answer by Vitomir (score -1) https://quant.stackexchange.com/a/45888 Under Efficient Market Hypothesis, future prices are nothing but the expected value of historical prices, given a probability and an information structure. Looking at historical prices can be useful. Indeed, a lot of the financial literature, spanning from Risk Management to Portfolio Management uses historical values. As you suggest, however, in case of structural breaks/jumps in time series historical values are useless. Nevertheless, current market micro-structure is led by arbitrage pricing theories and a continuous of traded prices for liquid securities. Thus, structural breaks are not that common, which makes historical values useful especially when used to gauge future values. I hope this answer helps as I tried to talk about the philosophy behind using historical data - as in your question - rather than the assumed mathematical substratum.
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