The SEC's Office of Investor Education and Advocacy is issuing this Investor Bulletin to educate investors about investment performance claims. If you are in the market for an investment, you will likely come across sales and marketing materials that describe an investment's performance.
You should know that performance information can be presented in many different ways. Before making a decision, always make sure you understand how any performance claim is calculated and presented - and whether or not the claim is reliable and applies to your particular circumstances. Here are a few things to consider.
How is performance calculated and presented?
Considering what factors are included in a presentation of performance calculations - and what factors are not - may help you use performance information to make a more informed investment decision.
Fees. You will likely pay certain fees related to your investment. Fees reduce investment returns, so you should always consider what fees are included in the performance calculations. If fees are not included in the performance calculations, information disclosing what fees were excluded and how the excluded fees would have affected performance should be presented. For more information about fees and expenses, see Investor Bulletin: How Fees and Expenses Impact Your Investment Portfolio.
Your financial circumstances. Performance is just one of many factors you may want to consider when making an investment decision. A presentation might not take into account factors such as your age, income, other investments, or debt, all of which may affect your financial situation and risk tolerance.
Market and economic conditions. Performance calculations should be considered in light of material market and economic conditions. For example, while a particular investment return might be above average during a period of economic downturn, that same return could be below average during a period of generally favorable economic conditions.
Methodology. A presentation should describe its process for calculating performance. Factors such as how a performance calculation accounts for dividends and its assumptions about taxes and market and economic conditions are important to understanding performance calculations.
How reliable is a performance claim?
Evaluating the reliability of a performance claim may help you use performance information to make a more informed investment decision.
Performance guarantees. It is virtually impossible to guarantee returns on investments that have market risk (e.g., stocks) because profitability may depend in part on future market forces.
"Backward looking" performance. Backward looking performance may be based on actual historical performance and/or "back-tested" performance information. "Back-testing" involves applying an investment strategy (sometimes referred to as an "algorithm" or "model") to past market conditions to show how the strategy may have performed if it had existed or been in operation then. Because back-testing does not portray actual performance, it should be clearly labeled as "hypothetical" or as a "simulation." Backward looking performance cannot predict how an investment strategy will perform in the future.
Cherry-picking past performance. Performance should not be presented for only periods of good returns and exclude periods of bad returns (a practice known as "cherry-picking"). You should question any performance presentation that does not cover reasonable time periods across variable market conditions, including both up and down markets.
Benchmark performance. The performance of an investment strategy may be compared to that of a benchmark (e.g., a market index that tracks how a particular segment of the market is performing, like the S&P 500). The performance of a benchmark may not reflect the deduction of the fees that you pay, which would reduce your returns. The choice of an appropriate benchmark is important in evaluating performance because it is important to compare apples to apples. If a performance presentation appears to use a benchmark representing a different market segment and types of investments than those called for by the investment strategy of your investment, you should question why that benchmark was used.
You may want to consider investment performance when making an investment decision. However, before relying upon performance claims, you should ask questions to help you understand how that performance is calculated and presented, and to evaluate the reliability of those performance claims.
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