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Can past performance predict future performance?

Most investors are well aware of the SEC’s warning that past performance isn’t an indicator of future performance. That warning often leads to questions like: “If past performance isn’t predictive, why do you believe that the past outperformance of value stocks over growth stocks and small stocks over large stocks is predictive?” The answer lies in understanding two key points.

First, the SEC’s warning relates directly to the performance of actively managed mutual funds. The warning is required because an overwhelming body of evidence demonstrates that for these funds even long periods of outperformance aren’t predictive — while some funds do outperform, it’s no more than is randomly expected.

Read the rest of the article on CBS MoneyWatch.

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