Investors and their advisors have eased into the perceived comfort of evaluating investment results over standard, fixed time periods, such as year-to-date or the past 1-3-5 years. These are all valid time periods to review, but I don’t think they are enough.
Why not? They are moments in time. A day after the 5-year return is analyzed, another one replaces it. So, focusing too much attention on the latest 5-year period is a step in the wrong direction. This is like dipping your hand into a big bowl of blueberries, choosing one and evaluating the entire bowl based on how that one blueberry tastes.
What’s a better way? For starters, incorporate “rolling returns” in the analysis, to supplement the standard to-date and trailing returns. That is, review returns over many 5-year periods the portfolio has experienced, not simply the latest one. By doing this, the advisor and client get much more data to conduct a more even-handed evaluation of how things are going. This also tunes out the “noise” often created by volatile markets over short time periods.
As an example of how using rolling returns can add tremendous perspective, consider this from the Sungarden Study, which we published earlier this year. One of the most striking conclusions of this research paper on retirement investing was that the S&P 500 has failed to produce even a 4% annualized return over the majority of 5-year rolling periods with a one month shift (e.g. Jan 31, 1994 – Jan 31, 1999, Feb 28, 1994 – Feb 28, 1999 etc.) since 1994! (Source: Morningstar Direct 2014) Bottom-line: when you look at something from all sides, you get a clearer picture of what you are actually looking at.
© Sungarden Investment Research