Unit 1 · Level 4 · The behavior gap
Last year's winner
Every January, 'best funds of the year' lists appear, and money floods into whatever topped them. But a fund usually tops the charts because its style or sector just had a hot streak, and hot streaks cool. ARK's flagship fund gained over 150% in 2020, attracted billions afterwards, then fell roughly 80% from its peak. Most of the money arrived just in time for the fall.
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What you get asked
Why does last year's top fund so often disappoint the people who buy it next?
The ranking rewards whatever just worked. Styles and sectors move in cycles, so buying the top of the list often means buying a style at the top of its cycle.
Put the performance-chasing cycle in order
Round and round it goes, each lap transferring a little wealth from the chasers to the patient. Step off the carousel.
Every fund document warns you: past performance is ___ guarantee of future results.
It's printed on everything for a reason: chart position tells you what already happened, not what happens to your money next.
Across decades of fund research, which single measure has best predicted future fund performance?
Morningstar itself found expense ratios predicted future results better than its own star ratings. Costs are certain; streaks are not.
Your global index fund ranked #214 this year while a tech fund ranked #1. What does the course say?
The haystack never tops the charts, and it never crashes off them either. Boring rank, beautiful compounding. 🐜
The rest of this unit
Funds do fine; their investors do worse. Close the gap between you and your own money.