November 5, 2014

When considering a certain type of investment, why should you consider the historical returns, while pushing aside the recent returns?

3 thoughts on “November 5, 2014”

  1. Garrett Haag says:

    You do not want to fall pray to recency bias, if something has had an amazing return this year such as REITS, you do not want to chase that performance. Just because something has went up 20% this year does not mean it will next. The historic return will be the average for that kind of investment that you have. Investments will revert to the mean, meaning that if something averages 10% a year historically and this year it went up 20%, there will likely be a 5% year coming up to return the mean back to 10%. You also do not want to get caught up in a bubble, many times if an investment has went up a bunch in a year it could be a bubble and pop in the near future such as what gold did recently. You want to know the historic return so you know what to expect in the future, if you have bonds you should not expect 10% returns just because they did it one year.

  2. Brennan Haag says:

    When you invest it should be for the long term. Just because an investment is doing particularly well at the moment it doesn’t mean that the investment is going to continue to do well or it could have a really poor history. You should invest in something that has historically done well because it will be more likely to do well in the future.

  3. Mike Finley says:

    Well said, gentlemen. I have nothing to add. Great job!

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