Infographic: How is Buying a Car Different From Selecting An Investment?
From Vanguard and seen on Visual Capitalist (hat tip to Big Picture Blog):
Quick explanation: Looking at past performance of cars is generally a good predictor of how the cars will perform in the future. As evidence, the chart shows that 8 of the top 10 cars from 2005 were still top performing in 2014. With investments on the other hand, the second chart which shows annual returns for various asset classes shows no discernible pattern. Yet, too many investors think that past performance is an indicator of how they will perform in the future and make the mistake of piling into funds on a hot streak just at the wrong time (Side note: Guilty as charged! I once bought a fund that appeared on the cover of Forbes magazine pre-Great Recession. It was featured as one of the best 10-year mutual fund performers. Loaded up with housing stocks and financials you can guess how it fared in 2008-09. Index funds there I went!).
So, what to do given that you can’t pick investments based on past performance. Here’s some advice from Vanguard:
Questions for students:
- Is it a good idea to purchase a car based on its previous track record? What evidence would you provide?
- Same question for investments? What evidence can you provide?
- Each of the boxes in the second chart corresponds to a certain type of stock investment. For example, the Russell 1000 is an index made up of large company stocks. Find an asset that performed well (#1 position) over several periods. How did it do after those years of strong performance?
- How should this impact the way you think about investing?
About the Author
Tim's saving habits started at seven when a neighbor with a broken hip gave him a dog walking job. Her recovery, which took almost a year, resulted in Tim getting to know the bank tellers quite well (and accumulating a savings account balance of over $300!). His recent entrepreneurial adventures have included driving a shredding truck, analyzing executive compensation packages for Fortune 500 companies and helping families make better college financing decisions. After volunteering in 2010 to create and teach a personal finance program at Eastside College Prep in East Palo Alto, Tim saw firsthand the impact of an engaging and activity-based curriculum, which inspired him to start a new non-profit, Next Gen Personal Finance.
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