Three-card Monte is a slick confidence game, typically played by street vendors. The victim places a bet on his ability to select the “money card” among three cards that are placed face down on a table. The gullible player has no chance of winning.

The securities industry has its own version of three-card Monte. It touts past performance and seeks to distract you from focusing on what really matters: Low costs.

Past performance is irrelevant

Mutual funds are required to make this disclosure in their marketing materials: “Past performance is not an indicator of future outcomes.”

Despite this disclaimer, mutual fund marketing materials often tout past performance, leading investors to believe that it’s likely to persist.

It doesn’t.

One study looked at the performance of 641 actively managed funds. A puny 0.3% of the top performing funds in 2012 stayed in the top quartile in March 2016. That means that 99.7% of top performing funds were unable to replicate their stellar performance only four years later.

Touting big returns appeals to greed. The standard disclaimer is not enough to dissuade investors, who pay little attention to it. If the Securities and Exchange Commission was genuinely interested in protecting investors, it would require them to sign a statement before purchasing any actively managed mutual fund, that would set forth the following, prominently and in bold:

I fully understand past performance is not indicative of future performance. I also understand almost all top performing mutual funds are unable to repeat their performance in the future, especially over the long term.

I have been informed that low management fees are a much better predictor of higher expected returns and that index funds typically have lower management fees than actively managed funds.

This will never happen because the securities industry is too powerful.

What matters

As indicated in my proposed disclaimer, low fees are the most accurate predictor of higher expected returns.

No less an authority than Morningstar reached this conclusion, based on their analysis. It found: All told, cheapest-quintile funds were 3 times as likely to succeed as the priciest quintile.

The bottom line when you are selecting mutual funds is to look for ones with the lowest management fees (often called “expense ratios”).

That’s the real “money card”.

Don’t be fooled.

Resource of the Week

This blog post debunks the myth of relying on past performance.

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