Ben Carlson recently wrote a great article on how one year returns do not say much. They are not good measurements to judge how an investment or asset class (or even portfolio manager) has performed. He wrote his article in response to someone in the financial industry who posted a chart that showed the trailing one year return for all (or almost all) asset classes was negative. As he pointed out, charts like these always raise questions/comments like:
Does diversification even work?
Is everything broken?
Why hire an advisor? (This one hurts…)
This is why “cash is king”.
And much more.
I will quickly point out that anyone who questions diversification after seeing that chart needs to review their primary education. The chart shows the worst trailing return is -25.4%, while the “best” performer was -0.3%. That is a 25.1% difference in return! Pretty sure that proves diversification “still” works.
I want to piggyback on what Ben Carlson says about one year returns mean nothing by showing the calendar one year returns of the S&P 500 Total Return going back to 1996. I also want to use a different starting point…09/30/95. Instead of “calendar” annual returns, it will be October to October returns. And just to throw in more numbers, I added June to June returns. Let us juxtapose these one year returns.
The time periods overlap, but look how different each one is from its companions. I bet my next month’s salary that , if I did not tell you, you would think these were different asset classes, and not the S&P 500 on different starting points.
Some periods are bold that I think show the widest disparities.
Which one has the greater accumulated return? Can you guess? I’ll show you.
When all is said and done, their accumulated returns are pretty similar when you factor in this is over twenty years’ worth of data. The one with the best return is simply the one that started investing earlier. The worst one is the one that has the latest starting point…or is it because we started investing in May. Oh no…I did not follow the “sell in May and go away” motto!
However, I will prove that it is simply because the May starting point (meaning 05/31/96) is later than the other two. Below is a May starting point of 05/31/95:
See! A higher accumulated return.
What is my point? Even within the same asset class, trailing one year returns are very deceptive and you should not waste your time analyzing them.
As always, this if for informational and educational purposes. Nothing contained herein constitutes tax, legal, insurance or investment advice, or the recommendation of or an offer to sell, or the solicitation of an offer to buy or invest in any investment product, vehicle, service or instrument. What has worked in the past may not work in the future. Past returns do not guarantee future results.