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Past returns are not even a reliable guide to the past

We are often warned by investment managers that past performance is not an indicator of future returns, but Towers Watson goes even further: past returns are not even a reliable indicator of past returns.

They point out that retail investors are not good at ‘buy and hold’ and suffer from switching at the wrong time as they chase better results. Investors rarely achieve the reinvestment of dividends assumed in compounding calculations, which rarely allow for tax payments. A quoted return which assumes reinvestment of gross dividends is very difficult to achieve. And then there’s the emotional drain of feeling losses more than enjoying profits, as investors struggle to distinguish between a noise and a signal.

The full Towers Watson research paper is here.

 


 

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