The SEC’s Office of Investor Education and Advocacy is issuing this Investor Bulletin to educate investors about investment performance claims.  If you are in the market for an investment or investment firm, you may come across sales and marketing materials that describe an investment’s performance or the performance of an investment firm.  You should know that performance information can be presented in many different ways and that past performance does not necessarily predict future results.  Before making a decision, always make sure you understand how any performance claim is calculated and presented – and whether or not the claim seems too good to be true and the investment or professional makes sense for you given your particular circumstances.  Here are a few things to consider.

How is performance calculated and presented? 

Considering what factors are included in a presentation of performance calculations—and what factors are not—may help you use performance information to make a more informed investment decision.    

Fees and expenses.  You will likely pay certain fees and expenses related to your investment.  Fees and expenses reduce investment returns, so you should always consider what fees and expenses are included in the performance calculations.  If fees and expenses are not included in the performance calculations, you should ask what fees and expenses were excluded and how they would have affected performance.  For more information about fees and expenses, see Updated Investor Bulletin: How Fees and Expenses Affect Your Investment Portfolio.

• Your financial circumstances.  Performance is just one of many factors you may want to consider when making an investment decision.  A presentation might not take into account factors such as your age, income, other investments, or debt, all of which may affect your financial situation and risk tolerance.  A presentation also might not take into account your investment objectives and financial expertise to understand the risks and limitations of the investment presentation.
• Market and economic conditions.  You should consider performance calculations in light of relevant market and economic conditions.  For example, while a particular investment return might do well when interest rates are low, it may perform poorly when interest rates are rising.  
• Methodology.  You should look for a description of the process for calculating performance.  Factors such as how a performance calculation accounts for dividends and its assumptions about taxes and market and economic conditions are important to understanding performance calculations.  

How reliable is a performance claim?

Evaluating the reliability of a performance claim may help you use performance information to make a more informed investment decision. 

• Performance guarantees, targets and projections.  It is virtually impossible to guarantee returns on investments that have market risk (e.g., stocks) because profitability may depend in part on future market forces. Additionally, performance targets and projections can raise unrealistic expectations of future performance. Remember that targets and projections are hypothetical and do not reflect actual performance.
• Back-Testing.  “Back-testing” involves applying an investment strategy (sometimes referred to as an “algorithm” or “model”) to past market conditions to show how the strategy may have performed if it had existed or been in operation then. Remember that back-tested performance is hypothetical and does not reflect actual performance.  If you receive back-tested performance, you should consider asking what actual, historical performance was.
• Past performance.  Past performance is actual historical performance information.  However, past performance cannot predict how an investment strategy will perform in the future. 
• Cherry-picking past performance.  “Cherry-picked” performance presents performance for only periods of good returns and excludes periods of bad returns, or highlights only profitable investments.  An example of cherry picking would be an advertisement that highlights one period of extraordinary performance with no or little disclosure of unusual circumstances that have contributed to the performance.  You should question any performance presentation that does not cover reasonable time periods with different market conditions, including both up and down markets. 
• Benchmark performance.  The performance of an investment strategy may be compared to that of a benchmark (e.g., a market index that tracks how a particular segment of the market is performing, like the S&P 500).  The performance of a benchmark may not reflect the deduction of the fees and expenses that you pay, which would reduce your returns.  The choice of an appropriate benchmark is important in evaluating performance because it is important to compare apples to apples.  If a performance presentation appears to use a benchmark representing a different market segment and different types of investments than those called for by the investment strategy of your investment, you should question why that benchmark was used. 

Conclusion

You may want to consider investment performance when making an investment decision.  However, before relying upon performance claims, you should ask questions to help you understand how that performance is calculated and presented, and to evaluate the reliability of those performance claims.

Most importantly, be wary of performance claims that appear to be too good to be true or that are too difficult to understand.  Remember, it’s your money!

Additional Resources

Updated Investor Bulletin: How Fees and Expenses Affect Your Investment Portfolio

Investor Bulletin:  Mutual Fund Fees and Expenses

Investor Bulletin:  Brokers’ Miscellaneous Fees

Investor Bulletin: How to Select an Investment Professional