### Fund Comparison: Avoiding Recency Bias in Investment Returns

Investors should compare funds holistically to avoid being misled by recent performance.

### Rethinking Fund Comparisons: Avoiding Recency Bias and Emphasizing Diversification
* 📈 Many investors focus solely on the S&P 500 due to its **impressive returns**, which have averaged **close to 9% annually** since the financial crisis, vastly outperforming other countries like Switzerland at **just under 4%**.
* ⚠ However, relying solely on past performance can be misleading and may lead to **poor investment choices**, as evidenced by historical periods where the US market **underperformed significantly**.
* 🔍 To make better fund comparisons, it is crucial to **analyze multiple time frames** and **avoid cherry-picking periods**, as this can create a **false sense of security regarding returns**.
* 📊 A more effective method involves plotting **box plots** to visualize the distribution of returns, which helps investors **understand the range of potential outcomes** rather than just focusing on the median return.
* 🌍 Diversification across various countries and investment styles is advisable, as historical data shows that many countries have **similar median returns**, suggesting that recent outperformance may be due to **luck rather than consistent superiority**.
* 💡 For example, while large-cap growth stocks have performed well recently, small-cap value stocks have historically **outperformed over the long term**, highlighting the need for a **balanced approach**.
* 🔒 Additionally, using tools like the Incog app can help protect personal data, emphasizing the **importance of privacy** in today's digital age.
* 📉 Ultimately, understanding the **uncertainty of returns** and considering a **broader investment strategy** can lead to **more informed decisions** and **reduced risk over time**.

Should You Avoid The S&P 500?

My name is Ramin Nakisa and I started PensionCraft in 2016 as I felt strongly that I wanted to teach people how to invest well for themselves so they could stop making costly mistakes and losing their money through having to pay unnecessarily high fees.

Before starting PensionCraft, I worked in investment banking as a strategist and I was a frequent contributor on CNBC and Bloomberg TV. I have written two books about finance and investment: one for professional investors and one that explains how to buy and sell volatility using exchange-traded products.

I publish a new video on YouTube every Saturday and you can join me for a live Q&A on the 1st Thursday of every month at 7pm UK time.

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The Danger of Comparing Funds Solely on Returns

Many investors only own S&P 500 funds due to their strong returns.

Comparing funds based solely on returns is risky.

S&P 500's post-financial crisis outperformance is highlighted.

Common fund selection approach: ranking by performance and choosing the top performer.

The risk of cherry-picking data and recency bias is emphasized.

Analyzing US Market Performance Over Time

Comparison of MSCI US index vs. MSCI XUS index to show US outperformance since 2008.

Factors contributing to US market's strong performance since 2008 are discussed.

Periods of poor US market performance (2002-2008, early 70s-1988) are mentioned.

The importance of a holistic view of returns, considering uncertainty and luck, is stressed.

Considering investment horizons (5, 10, 20 years or more) when comparing funds.

Analyzing every single period within the chosen horizon to avoid anchoring on a specific period.

Using box plots to visualize distributions of 10-year returns for each fund.

Considering both lucky and unlucky returns (upper and lower tails of the distribution).

Comparing funds A and B, highlighting the importance of median return and dispersion.

If the difference between medians is within the error bars, there's little to distinguish between funds.

Visualizing return distributions using box plots or violin plots to show uncertainty.

Considering investment horizon as uncertainty increases with shorter horizons.

Diversification is encouraged due to the uncertainty around different funds.

Applying the Analysis to Different Investments

Analyzing returns of different countries using MSCI data since 1969.

Comparing US investment styles (equity vs. treasury funds) using Simba data set.

Analyzing the performance of different investment styles (large-cap growth, small-cap value, etc.).

Comparing cumulative returns of four global funds, highlighting the role of luck in outperformance.

Comparing portfolios using Portfolio Charts app, emphasizing the importance of considering worst-case scenarios.