Why Past Performances Can’t Predict the Future

February 8, 20236 min read
Why Past Performances Can’t Predict the Future
Share on facebookShare on TwitterShare on Linkedin

Key Takeaways

  • Past performance does not necessarily equate to future results.
  • When making decisions, investors must factor in variables such as market conditions, sentiment, and the possibility of chance.
  • Understanding the limitations of past performance can help investors make better decisions.

While the past is not necessarily prologue, investors can different when it comes to such considerations. Rather than reflecting on a broad range of factors when making investment decisions, they sometimes rely exclusively on past performance. Too often, that results in poorer outcomes. Here is why past performance cannot predict the future, and how investors should manage their assets instead.

“Past Performance is Not Indicative of Future Results”

The above regulatory risk warning appears on nearly all investment materials, including prospects about mutual funds, equity investments, and even alternative investments. It is so ubiquitous that even those with only a passing interest in investing are familiar with it. In fact, the phrase also applies to various fields, including finance, sports, and business in general.

The problem is that many investors, for the most part, ignore the omnipresent proviso. Such investors apparently believe they can beat the system and make investments based solely on past results, when variables such as market conditions, the environment, investor sentiment, and the possibility of chance should also be factored in. After all, the stock market is inherently unpredictable.

The Limitations of Historical Performance

Going back decades, studies on mutual fund performances, for instance, show that past performance cannot consistently predict future performance due to the unpredictability of stock market prices. The issue is that while historic performance is worth considering, it can be misleading.

In fact, the market’s strongest performers tend to change every decade. Technology was the rage in the 1990s, and banks and commodities were hot in the early 2000s. That was followed by the growth of FAANG stocks in the 2010s.

The Importance of Portfolio Diversification

It has been established that past performance is not indicative of future results. Rather than rely on such performance to mitigate risk, a smarter move might be to make sure holdings are sufficiently diversified. To weather constant public market shifts, the smart move might be to supplement traditional assets with those that are not directly tied to the stock market. Such portfolios tend to grow over the long term despite short-term fluctuations.

The Sharpe Ratio

A widely used tool for measuring risk-adjusted returns, the Sharpe ratio compares an investment’s return with its risk. The mathematical expression was proposed in 1966 by economist William F. Sharpe and divides a portfolio’s excess returns by a measure of its volatility.

There are limitations to the ratio when used as sole criteria for investment decisions, however. For example, portfolio managers can manipulate it to fortify their risk-adjusted returns’ history by elongating return measurement intervals. That can result in a reduced estimate of volatility.

In addition, due to extreme herding behavior in financial markets, the standard deviation used to determine the ratio might underestimate tail risk – the chance of a loss occurring due to a rare event.

Exploring Alternative Investments

As will be discussed in detail later, alternative investments such as art and real estate are increasingly popular as vehicles for portfolio diversification. Essentially, they are any assets that are outside the categories of stocks, bonds, or cash. Largely unregulated by the Securities and Exchange Commission, they usually have little correlation to standard asset classes. Portfolios that include alternatives tend to continue to grow regardless of market conditions.

Rise above Volatility

Diversify beyond the stock market with Yieldstreet.

Neglecting Diversification

Failing to diversify one’s portfolio, or have an overconcentration of similar investments, can promulgate unnecessary risk.

An example of the consequences of not diversifying is the “lost decade” from 2000 to 2010, when the S%P 500 generated an annualized total return of 0.9%. It was just the second time – the other period was the Great Depression – the market had a negative overall decade-long return.

Despite turbulence caused by the collapsed dot-com bubble, two recessions, and the 9-11 terrorist attacks, a closer look reveals an over-reliance on very large-cap stocks when investing more in medium-sized stocks in the S&P 500 likely would have delivered better returns.

Is Relying on Historical Performance Really That Bad?

After all, one would return to a restaurant after a good experience and will likely again patronize a mechanic who did a good job on the transmission.

Really, historical performance can count – when looked at another way. While nearly every investment carries long-term growth expectations, prices can fluctuate. For example, a long-term expectation that the stock market will return 7% over the next decade does not equate to an expectation of an exact 7% return every year. That is because there will be fluctuations.

Still, the warning “past performance is not indicative of future results” serves as a reminder to investors to consider a host of variables when deciding how to allocate funds.

In so doing, investors can avoid costly mistakes and adopt smarter predictive strategies including diversifying their holdings with assets that have no direct correlation to volatile public markets. Increasingly, investors are buying into alternatives to do just that.

Diversification through Alternatives

Traditional portfolio asset allocation envisages a 60% public stock and 40% fixed income allocation. However, a more balanced 60/20/20 or 50/30/20 split, incorporating alternative assets, may make a portfolio less sensitive to public market short-term swings.

Real estate, private equity, venture capital, digital assets, precious metals and collectibles are among the asset classes deemed “alternative investments.” Broadly speaking, such investments tend to be less connected to public equity, and thus offer potential for diversification. Of course, like traditional investments, it is important to remember that alternatives also entail a degree of risk.

In some cases, this risk can be greater than that of traditional investments.

This is why these asset classes were traditionally accessible only to an exclusive base of wealthy individuals and institutional investors buying in at very high minimums — often between $500,000 and $1 million. These people were considered to be more capable of weathering losses of that magnitude, should the investments underperform. However, that meant the potentially exceptional gains these investments presented were also limited to these groups.

To democratize these opportunities, Yieldstreet has opened a number of carefully curated alternative investment strategies to all investors. While the risk is still there, the company offers help in capitalizing on areas such as real estate, legal finance, art finance and structured notes — as well as a wide range of other unique alternative investments.

Moreover, investors can get started with a relatively small amount of capital. Yieldstreet has opportunities across a broad range of asset classes, offering a variety of yields and durations, with minimum investments as low as $10000.

Learn more about the ways Yieldstreet can help diversify and grow portfolios.

In Summary

The bottom line is that past performance does not necessarily equate to future results. Investors who understand the limitations of past performance can make better decisions regarding portfolio management, which can lead to better strategies and outcomes. One such strategy could be diversification through alternatives.

All securities involve risk and may result in significant losses. Alternative investments involve specific risks that may be greater than those associated with traditional investments; are not suitable for all clients; and intended for experienced and sophisticated investors who meet specific suitability requirements and are willing to bear the high economic risks of the investment. Investments of this type may engage in speculative investment practices; carry additional risk of loss, including possibility of partial or total loss of invested capital, due to the nature and volatility of the underlying investments; and are generally considered to be illiquid due to restrictive repurchase procedures. These investments may also involve different regulatory and reporting requirements, complex tax structures, and delays in distributing important tax information.

We believe our 10 alternative asset classes, track record across 470+ investments, third party reviews, and history of innovation makes Yieldstreet “The leading platform for private market investing,” as compared to other private market investment platforms.

1 Past performance is no guarantee of future results. Any historical returns, expected returns, or probability projections may not reflect actual future performance. All securities involve risk and may result in significant losses.

3 "Annual interest," "Annualized Return" or "Target Returns" represents a projected annual target rate of interest or annualized target return, and not returns or interest actually obtained by fund investors. “Term" represents the estimated term of the investment; the term of the fund is generally at the discretion of the fund’s manager, and may exceed the estimated term by a significant amount of time. Unless otherwise specified on the fund's offering page, target interest or returns are based on an analysis performed by Yieldstreet of the potential inflows and outflows related to the transactions in which the strategy or fund has engaged and/or is anticipated to engage in over the estimated term of the fund. There is no guarantee that targeted interest or returns will be realized or achieved or that an investment will be successful. Actual performance may deviate from these expectations materially, including due to market or economic factors, portfolio management decisions, modelling error, or other reasons.

4 Reflects the annualized distribution rate that is calculated by taking the most recent quarterly distribution approved by the Fund's Board of Directors and dividing it by prior quarter-end NAV and annualizing it. The Fund’s distribution may exceed its earnings. Therefore, a portion of the Fund’s distribution may be a return of the money you originally invested and represent a return of capital to you for tax purposes.

5 Represents the sum of the interest accrued in the statement period plus the interest paid in the statement period.

6 The internal rate of return ("IRR") represents an average net realized IRR with respect to all matured investments, excluding our Short Term Notes program, weighted by the investment size of each individual investment, made by private investment vehicles managed by YieldStreet Management, LLC from July 1, 2015 through and including July 18th, 2022, after deduction of management fees and all other expenses charged to investments.

7 Investors should carefully consider the investment objectives, risks, charges and expenses of the Yieldstreet Alternative Income Fund before investing. The prospectus for the Yieldstreet Alternative Income Fund contains this and other information about the Fund and can be obtained by emailing [email protected] or by referring to www.yieldstreetalternativeincomefund.com. The prospectus should be read carefully before investing in the Fund. Investments in the Fund are not bank deposits (and thus not insured by the FDIC or by any other federal governmental agency) and are not guaranteed by Yieldstreet or any other party.

8 This tool is for informational purposes only. You should not construe any information provided here as investment advice or a recommendation, endorsement or solicitation to buy any securities offered on Yieldstreet. Yieldstreet is not a fiduciary by virtue of any person's use of or access to this tool. The information provided here is of a general nature and does not address the circumstances of any particular individual or entity. You alone assume the sole responsibility of evaluating the merits and risks associated with the use of this information before making any decisions based on such information.

9 Statistics as of the most recent month end.

300 Park Avenue 15th Floor, New York, NY 10022


No communication by YieldStreet Inc. or any of its affiliates (collectively, “Yieldstreet™”), through this website or any other medium, should be construed or is intended to be a recommendation to purchase, sell or hold any security or otherwise to be investment, tax, financial, accounting, legal, regulatory or compliance advice, except for specific investment advice that may be provided by YieldStreet Management, LLC pursuant to a written advisory agreement between such entity and the recipient. Nothing on this website is intended as an offer to extend credit, an offer to purchase or sell securities or a solicitation of any securities transaction.

Any financial projections or returns shown on the website are estimated predictions of performance only, are hypothetical, are not based on actual investment results and are not guarantees of future results. Estimated projections do not represent or guarantee the actual results of any transaction, and no representation is made that any transaction will, or is likely to, achieve results or profits similar to those shown. In addition, other financial metrics and calculations shown on the website (including amounts of principal and interest repaid) have not been independently verified or audited and may differ from the actual financial metrics and calculations for any investment, which are contained in the investors’ portfolios. Any investment information contained herein has been secured from sources that Yieldstreet believes are reliable, but we make no representations or warranties as to the accuracy of such information and accept no liability therefore.

Private placement investments are NOT bank deposits (and thus NOT insured by the FDIC or by any other federal governmental agency), are NOT guaranteed by Yieldstreet or any other party, and MAY lose value. Neither the Securities and Exchange Commission nor any federal or state securities commission or regulatory authority has recommended or approved any investment or the accuracy or completeness of any of the information or materials provided by or through the website. Investors must be able to afford the loss of their entire investment.

Investments in private placements are speculative and involve a high degree of risk and those investors who cannot afford to lose their entire investment should not invest. Additionally, investors may receive illiquid and/or restricted securities that may be subject to holding period requirements and/or liquidity concerns. Investments in private placements are highly illiquid and those investors who cannot hold an investment for the long term (at least 5-7 years) should not invest.

Alternative investments should only be part of your overall investment portfolio. Further, the alternative investment portion of your portfolio should include a balanced portfolio of different alternative investments.

Articles or information from third-party media outside of this domain may discuss Yieldstreet or relate to information contained herein, but Yieldstreet does not approve and is not responsible for such content. Hyperlinks to third-party sites, or reproduction of third-party articles, do not constitute an approval or endorsement by Yieldstreet of the linked or reproduced content.

Investing in securities (the "Securities") listed on Yieldstreet™ pose risks, including but not limited to credit risk, interest rate risk, and the risk of losing some or all of the money you invest. Before investing you should: (1) conduct your own investigation and analysis; (2) carefully consider the investment and all related charges, expenses, uncertainties and risks, including all uncertainties and risks described in offering materials; and (3) consult with your own investment, tax, financial and legal advisors. Such Securities are only suitable for accredited investors who understand and are willing and able to accept the high risks associated with private investments.

Investing in private placements requires long-term commitments, the ability to afford to lose the entire investment, and low liquidity needs. This website provides preliminary and general information about the Securities and is intended for initial reference purposes only. It does not summarize or compile all the applicable information. This website does not constitute an offer to sell or buy any securities. No offer or sale of any Securities will occur without the delivery of confidential offering materials and related documents. This information contained herein is qualified by and subject to more detailed information in the applicable offering materials. Yieldstreet™ is not registered as a broker-dealer. Yieldstreet™ does not make any representation or warranty to any prospective investor regarding the legality of an investment in any Yieldstreet Securities.

YieldStreet Inc. is the direct owner of Yieldstreet Management, LLC, which is an SEC-registered investment adviser that manages the Yieldstreet funds and provides investment advice to the Yieldstreet funds, and in certain cases, to retail investors. RealCadre LLC is also indirectly owned by Yieldstreet Inc. RealCadre LLC is a broker-dealer registered with the Securities and Exchange Commission (“SEC”) and a member of the Financial Industry Regulatory Authority (“FINRA”) and the Securities Investor Protection Corporation (“SIPC”). Information on all FINRA registered broker-dealers can be found on FINRA’s BrokerCheck. Despite its affiliation with Yieldstreet Management, LLC, RealCadre LLC has no role in the investment advisory services received by YieldStreet clients or the management or distribution of the Yieldstreet funds or other securities offered on our through Yieldstreet and its personnel. RealCadre LLC does not solicit, sell, recommend, or place interests in the Yieldstreet funds.

Yieldstreet is not a bank. Certain services are offered through Plaid, Orum.io and Footprint and none of such entities is affiliated with Yieldstreet. By using the services offered by any of these entities you acknowledge and accept their respective disclosures and agreements, as applicable.

Investment advisory services are only provided to clients of YieldStreet Management, LLC, an investment advisor registered with the Securities and Exchange Commission, pursuant to a written advisory agreement.

Our site uses a third party service to match browser cookies to your mailing address. We then use another company to send special offers through the mail on our behalf. Our company never receives or stores any of this information and our third parties do not provide or sell this information to any other company or service.

Read full disclosure