The Hidden Skew in Investment Charts: How Early Outperformance Distorts the Picture
When evaluating funds, there are a myriad of different data points and narratives to consider. Most investors start with performance and most commonly are shown a performance or growth over time chart. If you invest $1 in a fund, how much would it have grown to. Simple.
While this “traditional growth picture” feels intuitive and it can provide useful information, it can also be deeply misleading.
Why? Because a few years of strong early performance can skew the chart, even if the fund underperformed for nearly the entire rest of its history.
The Illusion of Early Success
Take two hypothetical investments. In observing this chart, it’s very clear that Investment 1 would have resulted in a higher balance than Investment 2. Which the balances were close at the end, Investment 1 maintained the advantage.
In the very first year, Investment 1 posts a massive outperformance while Investment 2 earns more modest returns. That early head start is locked into the compounding path resulting in Investment 1 winning out on the traditional chart.
Why This is Important
This isn’t just theoretical—it happens in real life:
- New, small funds often take more concentrated bets or risks that aren’t possible once they scale up.
- A single outsized year of performance permanently boosts the long-term chart, even if results later flatten out.
- Marketing materials rarely emphasize when the fund outperformed—only that it “outperformed.”
Reverse Growth Picture: A Different Approach
Normally, an investment chart starts at $1 and moves forward in time, showing how the investment grew. That makes early performance stick—if a fund had a big jump in its first year, every future value is built on that higher starting point.
When you reverse the chart, you start at the end value and work backward in time. You’re asking: “If both investments ended at the same point, what did their journeys look like along the way?”
This change of perspective removes the advantage of early outperformance and shows how the investments performed relative to each other during most of the timeline.
If you do this for our hypothetical investments, you’ll see that the only time Investment 1 outperformed is if you just happened to be invested in it during the 1st period. Every other holding period after that has favored Investment 2 by a wide margin.
This concept is not unique but isn’t normally captured in chart form. If you look at performance metrics over time (ie 1 yr, 3 yr, 5 yr, 10 yr, Since Inception), this dynamic would play out. You would see the longer time frames outperforming but more recent shorter timeframes underperforming.
The Take Away
Performance charts are not neutral. They tell a story—and sometimes the story is skewed by history. Looking at investments through both traditional and reverse growth pictures allows investors to see past the optical illusion of early outperformance.
- Beware of “legacy outperformance.” A stellar launch period can keep a fund’s chart looking strong long after its edge is gone.
- Check consistency. Did the fund outperform across most periods, or just at the start?
- Don’t assume early success equals future success. The conditions that allowed for extraordinary first years often disappear once the fund grows.