Whether you are dealing with stocks or mutual funds, past performance in investing means that you are looking at the historical data of the investment. This data is usually turned in quarterly and is available to the general public, as well as professional investors. When you are examining this past data you are basically looking at how the investment did in past quarters.Funds that have really great past performances are usually funds that are involved in a “hot” sector for their market, but what most people do not realize is that if the market decides to slow down then the fund is not going to perform as well. People tend to think that because past returns were really high the fund is going to continue to pay out and be a really good investment and who could blame them, but when the investment suddenly declines many people are left wondering what they did wrong. In reality looking at past performance does not give you a very good outlook on the data because you never know what is going to happen in the next few months or years, which brings us to future prospect.
In the investing world future prospect means what it sounds like. This is a way of looking at how the investment is going to do in the future. Future prospect is basically trying to determine how well the stock or fund is going to do in the near future and what kind of return it is going to do, basically it is asking how well the investment is going to be able to do is it going to continue to remain high or is it going to slowly decline or better yet is it going to stay average. When you are looking at the future prospect of an investment you are going to have to examine the investments past performances to some degree but you do not want to heavily rely on that data. You are also going to want to look at the investment to see what it is doing, for example if the fund is involved in a “hot” section of the market and if there are signs of that market slowing down and other information.
Now we come to the terms buying high and selling low. Most people can easily understand these terms because they mean what they sound like. In the investing world the term buying high means that you are paying the highest price for a certain stock or a fund. When you sell low this means that you are actually losing money on the stock because you are selling it at a price below what you bought it for. When you are investing in stocks and bonds you actually want to buy low and sell high so that you are making money rather than losing money.
Now that you have an understanding of some basic investing terms we can answer the question why looking at past performance not future prospect means buying high and selling low. The simple answer to this question is that when you look at the past performance you have no idea what the stock is going to do in the future, and if the past returns are high there is usually a reason behind it, such as the investment is in a “hot” market. What past performance does not do is tell you if the market is cooling down so you can end up paying a higher price on the stock because of the market currently being hot only to find out two months down the road the market has cooled down considerable and you are now at a loss on your investment.