Monday, March 5, 2012

The illusion of superior fund performance

It is well documented that past mutual fund performance is a poor predictor of future performance.

And despite the fact that active mutual funds are all but guaranteed to underperform the average index fund in the long run, people still chase winners.   A nice article in the NYT presents some recent data showing the folly in this strategy.

A simple analogy explains the main point - if I flip a coin 4 times and each time it lands on heads, does this mean that it will land on heads the 5th time because I am a skilled coin flipper?