What is a fund's "performance history," and is it important?
Performance history as it relates to mutual funds is just the past performance a fund; what it's historical performance has been over time. A lot of people look at that as the sole reason to invest in a certain mutual fund or the number one category the number one determinant of whether we should invest in a mutual fund, and really it needs to be the last decision factor of why we're going to invest in a mutual fund, and there's a few reason for that; one of the problems of looking at past performance is it's not telling us what the fund is doing. Is it possible that the money manager made a really big bet on a single stock and got really lucky, and so their performance looks really good but there's really not good explanation that that performance is going to continue to happen. Another potential problem about looking at past performance might relate to it's individual year by year performance. If you're looking at a five year history, you might not be picking up let's say two really really bad years; if has two really good years and so you might be missing some of the volatility, which is really going to affect you year by year. It's also possible that past performance has nothing to do with this being a good fund but the fund happens to be in a really good category and that category, whether its large growth or large value; whatever it might be a certain sector might have just gone through a really good investment cycle, and so it might be about to go into a bad investment cycle. So past performance alone can be very misleading into the really what we expect to happen going forward with a mutual fund.
