A recipe for disasterThe big danger of past performance is that investors simply chase the highest returns, whether it's a stock or an investment manager. That's usually a recipe for disaster. As former Vanguard chief investment officer Gus Sauter explains, market segments go in and out of favor.
"In fact, frequently funds that outperform over one period will underperform over the next simply because they were riding a wave that dies out, just like an ocean wave that peters out when it reaches the shore," Sauter writes.Past performance can be troublesome because it's difficult to determine whether good results were due to luck, or skill. That's one reason why we use risk-adjusted performance for the portfolio managers on Covestor. We also award "badges" to portfolio managers who exhibit consistent, stable performance. We want to help investors understand how much risk the manager took on to achieve his or her returns. Our transparent platform also lets investors view managers' past trades to help them understand their investment approach.