The other day I posted an article about the difficulty active managers have in outperforming their target indices. One of the reasons we turn to evidence-based investing is to guide us past the misguided strategies that can otherwise cause an investor’s expected returns to fall short. There is a lot of evidence available for research. How do we determine which of it comes from sound science and which may steer you wrong?
Read the full Survivorship Bias article here: Survivorship Bias Almost Accurate
- What is it?
- Does it Matter?
- What does this mean for me?
If these disregarded data points were golfers on the professional tour, they’d be the ones missing the cuts. They wouldn’t be able to play on the weekend. They wouldn’t earn money. They would quickly turn their love for golf into a hobby and find other means of supporting their family. Is there a difference between the average earnings of professional golfers on tour and the average earnings of all golfers? When assessing a player’s ability to play at elite levels, isn’t it important to consider both the wins and the losses? You bet! Same thing with fund performance.
Instead, an analysis of only the winners is very likely to report overly optimistic outcomes for the group being considered. While a degree of optimism can be admirable in many walks of life, basing your investment decisions on inflated results is more likely to set you up for disappointment than to position you for realistic, long-term success.