Past Performance and Your Investing Returns

Past Performance and Your Investing Returns

Past performance is not an indicator of future results.” Investors have heard this disclaimer for years, yet when it comes to picking investments we can’t help but look to a fund’s historical results to determine its quality.

Indeed, it’s one of the first questions asked whenever I mention the idea of switching to an indexed investing approach, or using a robo-advisor. How do their returns compare?

Online investing platforms are relatively new to the scene and so unlike many established mutual funds they don’t have a lengthy track record for investors to compare and measure results.

Past Performance as a Measure

But I argue that using past performance as a measure for future investment returns is misguided for two reasons.

  1. Cost is a better predictor of success. Morningstar grouped mutual funds together from different sector classes and sorted them by fees. The cheapest funds were three times as likely to succeed as the priciest funds (success was measured as outperforming its category group).
  2. Past performance needs context. Knowing that a mutual fund returned 7% annually over the past five years means little until you compare that with an appropriate benchmark over the same time period. If you find that a comparable index fund returned 9%, then the mutual fund underperformed.

RBC Balanced Fund vs. Robo-Advisor Balanced Portfolio

Let’s examine RBC’s popular Balanced Fund (RBF272), which has been around for more than thirty years and has nearly $5 billion in assets under management.

The fund has delivered annual returns of 6.2 percent since inception. It is comprised of about 36% Canadian bonds, 33% Canadian stocks, 10% U.S. stocks, 8% International stocks, plus some underlying mutual funds and cash. The management expense ratio (MER) of the fund is 2.16%. <—–That’s high!

The RBC Balanced Fund has a decent track record for a fund in its category, but we want to know how it will perform in the future.

What we know for certain is that the returns delivered by this fund will be reduced by 2.16% every year. A similar fund (or portfolio of funds) that charged just 0.66% annually should theoretically outperform RBC’s Balanced Fund by 1.50% a year.

Related: Yes, You Can Retire Up To 30% Wealthier

Now compare that with a balanced portfolio offered through a robo-advisor platform. An investor could get a similar mix of Canadian bonds, Canadian equities, and U.S. and International stocks (60% stocks, 40% bonds), although less tilted towards Canada.

Robo advisor balanced portfolio

Since robo-advisor platforms are fairly new, investors won’t find any lengthy past performance numbers to compare with something that has the track record of RBC’s Balanced Fund. However, my argument is that past performance numbers mean very little when it comes to the quality of a portfolio and its future expected return.

Investments managed by a robo-advisor give you an edge on fees because they typically use low-cost index funds and ETFs to make up a diversified portfolio.

Related: The Top ETFs and Model Portfolios for Canadians

Even without much of a track record at all, past performance of a robo-advised portfolio can be safely ignored because the investments inside are set up to track particular indexes and deliver those market returns, minus a small fee.

How should you think about choosing your investments?

First, while costs aren’t the be-all and end-all of investment selection, they do matter. A lot. Aim to keep your investment fees as low as possible.

Second, diversify. Nobel-prize winning economist Harry Markowitz called diversification, “the only free lunch in finance.” The idea is that by diversifying, an investor gets a benefit (reduced risk) at no loss in returns.

Third, be risk-aware. If you can’t stomach the idea of stocks losing 30% or 40% in a short period of time, then don’t put 80% or more of your portfolio in stocks. A balanced portfolio of 50% to 60% stocks and 40% to 50% bonds will lower that volatility and smooth out your investment returns over time.

Fourth, know your competencies. If you have the skill, drive, and temperament to manage your own investment portfolio then by all means open up a discount brokerage account and go the do-it-yourself route. However, if you lack one or more of those traits, it makes sense to pay someone else to manage it for you.

Investing made easy

The advent of robo-advisor digital investing platforms has made that last point easier and a lot more palatable for investors.


By using a robo-advisor investors are likely to save at least 1% to 1.5% each year on their investment fees (compared to a bank managed portfolio). Expect to pay around 0.50% for a robo-managed portfolio, plus a bit less than 0.20% for the management expense ratios (MERs) charged by the ETFs held inside your portfolio.

Robo-advisors construct their portfolios with global diversification in mind, giving you access to Canadian stocks and bonds, plus thousands of U.S., International, and Emerging Market stocks.

Robo-advisors have pre-packaged portfolios tailored to your risk profile, so if you’re an ultra-conservative, risk averse investor you can get a portfolio heavy on fixed income with a dash of equity exposure. Alternatively, an investor looking for maximum growth can get a portfolio tilted more heavily toward equities.

Related: Using a Robo Advisor in Retirement – A Wealthsimple Case Study

Finally, for those who lack the know-how or want-to, a robo-advisor offers an easy solution for investors to achieve all three of those objectives while saving for the future.

Final thoughts

If you’re investing in mutual funds on your own or through a traditional advisor, consider the amount of fees that you pay annually and whether you’re getting value for that advice. You might find you’re overpaying for advice, or that your managed investments are lagging behind the market (or both).

If that’s the case, a robo-advisor solution would be a great alternative for your investments. You’ll get lower fees, broad diversification, and customized portfolios designed to capture market returns at an appropriate level of risk.

That last point is key: you’re capturing market returns, not chasing past performance or trying to beat the market.

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1 Comment

  1. Emma on August 18, 2020 at 8:44 am

    Thank you for your article. It was very instructive.
    For robot-advisors, I understand that it may be difficult to benchmark their returns and compare their past returns with the ones of other robot-advisors. However, for normal index funds, I was wondering if it could not make sense (especially for actively managed funds). If, for instance, the fund has been operating for several decades already with good average returns and a low volatility compared to its benchmark, can’t we say that this is a sign for good management and thus, that the fund may continue to perform well in the future?

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