Misleading Performance Claims

Why this matters

Performance numbers are the most persuasive part of any investment pitch, and the easiest to slant without saying anything false. The SEC's investor bulletin on performance claims stresses that performance can be presented in many different ways and that past performance doesn't necessarily predict future results.¹ Knowing the common distortions lets you read any claim on fair terms.

Five common distortions

• Cherry-picking. Showing only periods of good returns, or only the profitable investments. The SEC suggests questioning any presentation that doesn't cover reasonable periods with different market conditions, including both up and down markets.¹
• Back-tests. Applying a strategy to past market data to show how it would have done. It's hypothetical, not actual performance, so ask for the real track record.¹
• Returns before fees. Fees reduce returns, so ask what was left out of the calculation.¹
• The wrong benchmark. Comparing a strategy with an index from a different part of the market, or one that doesn't reflect fees, can flatter it.¹
• Convenient start dates. "Up 80% since March" sounds great if March was the bottom of a crash. A fall of 50% followed by a rise of 80% still leaves you 10% below where you started, because 0.5 × 1.8 = 0.9.

What the rules require of advisers

Registered investment advisers face specific advertising rules. An adviser that shows performance before fees must also show it after fees, with at least equal prominence and over the same period. Ads that show a portfolio's results, other than a private fund's, generally must include 1-, 5-, and 10-year periods. The rule treats back-tested results, model portfolios, and targeted or projected returns as hypothetical performance.² Social media accounts, newsletters, and course sellers often aren't registered advisers, so these standards may not apply to them at all.