Should You Ignore Past Stock Market Returns? Yes and No
This article appears as part of Casey Weade's Weekend Reading for Retirees series. Every Friday, Casey highlights four hand-picked articles on trending retirement topics and delivers them straight to your email inbox. Get on the list here.
Weekend Reading
A recent Financial Times article titled "Past Performance Is a Public Enemy" argues that stocks leading in one calendar year rarely repeat their success in the next. While this may seem like a warning against relying on past performance for future investment decisions, author John Rekenthaler believes the evidence is incomplete.
READ THE ARTICLEWhat you should know: Academic research shows that past stock market returns can sometimes be useful when analyzed over different time frames. For example, economist Eugene Fama's landmark research suggested short-term price changes are unpredictable, but further studies from other analysts found that longer-term losers often outperform over three years, while short-term winners continue to win. Other studies have uncovered similar anomalies, challenging the notion that stock prices follow a purely random path.
Key takeaways: You can find valuable insight from past stock market performance, but be mindful that the benefit often diminishes once patterns become widely known.