You have likely encountered companies that provide easy ways to grade investments using various ranking systems. While the convenience of these services appeals to many people, I just finished reading a white paper by Thomas Huebscher, Phd that should cause investors to think twice before relying on such ratings. One popular company claims that their research models provide a quick summary as to which investments are worth keeping, but Huebscher’s study revealed that this ranking system was actually a terrible predictor of a given investment’s future performance.
The investing public clamors for help in making sense of today’s seemingly nonsensical financial world. Companies naturally capitalize on this demand, but they fail to deliver for one reason. They are not forward thinking. We would never dream of navigating our cars by only looking through the rear view mirror, but many people do not think twice about parking their money in whatever vehicle seemed “safe” or profitable yesterday. There is something about money that makes reasonable people behave in ways they never would otherwise.
Since ranking systems have proven unreliable, here is some advice you can count on. Learn from the past so as not to repeat mistakes, but be sure to look forward when planning for the future.
