Making sound financial decisions isn’t about predicting outcomes—it’s about following a process that gives you the best odds of achieving your long-term goals. A good decision, then, is not judged by whether it happened to turn out well, but by whether it was made for the right reasons, using reliable evidence and a rational framework. In finance, outcomes are noisy. Even bad decisions occasionally lead to good results, just as good decisions sometimes lead to disappointing ones. What matters is whether the decision process filters out the noise.

Noise refers to unpredictable, random variation in outcomes that has no reliable connection to underlying skill, value, or signal. In investing, the data say that short-term performance is overwhelmingly noisy. A fund might outperform over five years due to skill—or luck. The challenge is that, in most cases, we can't tell which. As Professor Ken French famously puts it, a five-year performance chart ‘tells you nothing’ (Rational Reminder 2020). The human mind sees patterns where none exist; but financial markets are full of noise masquerading as a signal.

Cutting Through the Noise: Practical Guidance for Evaluating Investment Pitches

Let’s be clear: the data say that short-term performance—especially over five years or less—is more likely to reflect randomness than repeatable skill. That means any investment pitch that relies heavily on a five-year performance chart should raise your scepticism, not your confidence.

So how can investors and financial planners make good decisions in the face of persuasive but potentially misleading evidence?

Here are five filters to apply when evaluating a fund manager's pitch:

1. Ignore the Short-Term Track Record

If the first thing a fund manager wants to show you is a five-year graph, that’s a red flag. Five and even ten years is not long enough to distinguish between luck and skill. As Carhart (1997) and others show, most apparent outperformance disappears once risk, style, and fees are accounted for.

Instead, ask:

How did the strategy perform in different market regimes (e.g. 2008, 2020)?
Has it been consistent with its stated investment philosophy?
Is there any evidence that it would continue to perform well for fundamental, not historical, reasons?

2. Understand the Underlying Strategy

Good decisions are made when you understand how returns are generated, not just that they were. Ask:

What economic rationale underpins the strategy?
Is it targeting known sources of return like value, momentum, or profitability?
Does the manager articulate a clear, systematic process—or is it discretionary and opaque?

If the process isn’t repeatable or grounded in sound theory, any past success is likely to be unsustainable.

3. Follow the Incentives

Evaluate how the manager is paid, and whether their incentives align with investor outcomes:

Are performance fees encouraging excessive risk-taking?
Does the firm launch multiple funds and only highlight the winners (the ‘multiple shots on goal’ problem)?
Are they being rewarded for attracting assets, rather than delivering consistent results?

Good decisions account for agency risk—the risk that someone else’s goals may not match your own.

4. Don’t Underestimate Cost and Tax Drag

The data say that fees are among the most reliable predictors of future net performance (Bogle 2007). Costs compound just like returns—only in the wrong direction. Ask:

What is the total ongoing charge?
Is the strategy tax-efficient?
How does this compare to a low-cost index fund pursuing a similar objective?

Good decisions weigh net returns—what you actually keep—rather than gross returns.

5. Can You Stick With It?

The best strategy in the world is worthless if the investor can’t stay invested. Ask:

How volatile is the strategy?
How likely am I to abandon it after a period of underperformance?
Has the manager or adviser prepared me for inevitable downturns?

Good decisions are not just optimal on a spreadsheet—they are behaviourally realistic.

Bottom Line: Don’t Be Fooled by a Pretty Chart

Investors don’t need more star managers; they need better filters. A five-year chart may look compelling, but the data say it contains more noise than signal. A good financial decision is one that:

Is grounded in evidence, not marketing,
Is designed to be repeatable, not opportunistic,
Accounts for costs, incentives, and behaviour,
And accepts uncertainty, rather than pretending to eliminate it.

The best investment strategy isn’t the one that worked best recently. It’s the one that you understand, believe in, and can stick with for the long haul.

References

Bogle, John C. 2007. The Little Book of Common Sense Investing. Hoboken: Wiley.

Carhart, Mark M. 1997. ‘On Persistence in Mutual Fund Performance’. Journal of Finance 52 (1): 57–82.

French, Kenneth R. 2010. ‘Luck versus Skill in the Cross-Section of Mutual Fund Returns’. [Presentation], University of Chicago Booth School of Business.

Marks, Howard. 2011. The Most Important Thing: Uncommon Sense for the Thoughtful Investor. New York: Columbia University Press.

Rational Reminder. 2020. Episode 100: Prof. Kenneth French: Expect the Unexpected. Accessed July 2025. https://rationalreminder.ca/podcast/100

SPIVA. 2024. SPIVA Europe Scorecard. S&P Dow Jones Indices.

What Does a Good Financial Decision Look Like?