If you are one of those people who assess your investment performance on an annual basis, it is very important to consider the effect that one month can make. Consider which twelve months you are talking about and the impact of moving the yearly period by just one month. Let’s see how that has worked out by comparing the two most recent 12 month periods: one ending at the end of December 2016, and the other ending on January 31, 2017.  It has been widely reported that the S&P 500 total return for 2016 was nearly 12%; however, just by looking at the 12 months ending January 31, 2017, (i.e. from February 1,  2016 until January 31, 2017) the return was 20.04%. That is because in the latter time period, a relatively bad month (January 2016) was dropped from the computation and a relatively good month (January 2017) was added. The variation in return was significant. The point I am making here is that periods as short as one year can create a lot of statistical noise.

What if you have a more broadly based asset allocation, such as the typical “balanced” portfolio that held 60% of its assets in the S&P 500 (SPY) and 40% in the 7-10 Year Treasury (IEF) for all of 2016? The 2016 total return would have been 7.6%.  That same portfolio in the period February 2016 thru January 2017, returned 11.29%.  Still a very wide difference.  Here is the comparison of those two periods along with the same portfolio that was re-balanced quarterly.

Source:  Morningstar Direct, DSNI

So what do you do with this information.  First, take caution when someone tells you that they had a really good or, for that matter, a really bad year. Understand what that means by first considering which twelve months is being addressed. Ask for a longer view.  This phenomenon also points to the sequence risk of returns. In other words, a strong return or sudden loss could have a measurable impact on the accomplishment of your goals when it occurs at the front end of your investment time horizon. This can be seen by looking at various periods that have a common end date.

Since the news reporters like to talk about what has happened since the 2008-09 market bottom, our team thought it would be interesting to look at the performance of the same 40% IEF: 60% SPY portfolio for four time periods all of which end on January 31, 2017, but which begin at different times. See the chart below for the analysis. Do you see how the different times periods could be chosen to support a particular narrative that the reporter is trying to tell?  The stated returns are annual and include dividends. The blue bar shows the annual return had you invested at the 2007 market peak, the gray bar if you had invested at the 2009 market bottom, and the other two periods thrown in for comparison. Once again, the buy-and-hold portfolio is compared to one that was re-balanced every three months.

Source: Morningtar Direct, DSNI

Remember the admonition on every prospectus: “past performance is no guarantee of future returns.”   Due to rather extreme valuations in stocks, that is probably more true today than it has been for many years.