The Proper Perspective
Free your investments from the calendar’s arbitrary conventions.
January through December. What’s so special about those particular twelve months? In theory, the year could begin on any day. Indeed, this is the case around the world. Many different cultures and religions celebrate the beginning of their new year on different days throughout “our” year. 1 From that perspective, January 1st does seem somewhat arbitrary. Really, January through December are only of significance because we all agree that they should be and collectively act as such.
But why should investment performance from January through December be more significant than performance from February to January or from July to June or from any other twelve-month period, for that matter? From the perspective of protecting and building wealth, this doesn’t seem to make much sense. As I will argue, measuring performance thusly is, at best, misleading and, at worst, leads to poor decision making.
Properly evaluating investment performance is a large and complex topic, far too much to handle adequately in a single column. I will focus here on a narrow aspect, evaluating performance on an absolute basis over a single calendar year. Other aspects will be addressed in due course. This being January, the arbitrary start of our year, the subject at hand is quite timely.
Rather than adhere to Pope Gregory XIII’s 450-year-old timetable, I humbly put forth that investment performance is best evaluated over rolling time periods. If intent on evaluating investment performance over a twelve-month period, you would look at not only January through December but also February through January, March through February, April through March and so on.
Let’s look at the recent performance of the S&P 500. The index returned 24% last year, very strong performance in absolute terms. 2 The year prior, the index returned a disappointing (19%). However, just a small change, in either direction, would have produced different conclusions.
If the twelve months of 2023 had instead run from December 2022 through November 2023, then the index would have returned just 12% in “2023.” Still good, but not quite as strong. Similarly, if the twelve months of 2022 had instead run from February 2022 through January 2023, then the index would have returned (10%) in “2022.” Still disappointing, but not quite to the same extent. Such large changes from such small shifts perfectly demonstrate the arbitrary nature of attaching special significance to calendar year performance.
The second issue with evaluating investment performance on a calendar year basis is that twelve months is just too short a period of time. If your objective is to protect and build wealth over a 20-, 30- or 40-year period, you should not be particularly concerned about what transpires over any given twelve-month period.
Rather, the correct period of time over which to evaluate investment performance and make investment decisions is most accurately described as “long.” Unfortunately, there is no widely accepted definition of “long” and, complicating matters further, the appropriate length actually changes over time.
Despite this ambiguity, long time periods are necessary because of all the randomness, variability and uncertainty ever present in financial markets. Anything can happen in the short run. Good things can happen. Bad things can happen. However, in the short run, there is often not enough time for both good things and bad things to happen. This makes it hard to judge the effectiveness of investment decisions over short time periods.
Expand the time period, however, and there is a better chance that all the good will offset all the bad and, consequently, reveal the true, underlying trend. For this same reason, many advise that you should weigh yourself weekly, not daily. Step on the scale too often and it is too easy to get discouraged or encouraged by what turns out to be just the normal variability inherent in almost every aspect of life.
Over a rolling twelve-month period, performance of the S&P 500 has ranged from (45%) for the “year” ended February 2009 to 54% for the “year” ended March 2021. Expand the period to five years, however, and outcomes range from (9%) annualized for the period ended February 2009 to 26% annualized for the period ended December 2000. At ten years, the minimum and maximum tighten further, to (5%) and 17%, respectively.
In finance, the period of time required for randomness to balance out is typically referred to as a complete market cycle. These cycles vary in length, as mentioned, and have no commonly accepted start or end date. Their duration is knowable only in retrospect. Five years is often used as a proxy, but something like seven to ten years is probably best. Three years is too short, in my opinion.
The challenge with using longer periods is that significant and valuable time lapses before suboptimal investment decisions are finally identified. Things can go right for the wrong reasons for a while, but not forever. Similarly, smart investment decisions can initially appear to be anything but, for wholly unrelated reasons, before finally paying off.
As a result, I advise my clients to evaluate investment performance as they wish, but understand that the longer the time period under consideration the more meaningful the results and the stronger the conclusions to be drawn from them. This best illustrates the tradeoff between quality and timeliness.
Much wisdom about investing has strong parallels to everyday life and the present case is no exception. Just as you shouldn’t judge investment performance over an arbitrary twelve-month period, you shouldn’t judge the outcomes of your personal and professional efforts on a day-to-day basis. Just as you need to employ a disciplined investment strategy to perform well over time, you should stay disciplined regarding the day-to-day personal and professional factors under your control. Only shift your focus to outcomes when enough time has passed for all of the normal ups and downs in life to have balanced out.
The calendar year should bear no more weight on your opinion of success or failure than any other twelve-month period. And whatever transpires over any given twelve months shouldn’t have much impact at all. The longer the time frame you can use, the better off you’ll be.
For those who embrace this wisdom over time, you have two advantages that others do not when seeking to protect and build wealth. One, you are free to place no more importance on any given twelve-month stretch than on any other. Your decisions are not bound by the calendar. Two, you are free to take a long-term perspective. You can make randomness, variability and uncertainty your allies rather than foes. So go ahead and celebrate the year just completed and the annual, arbitrary turning of the calendar to a fresh beginning. Just keep everything in the proper perspective as you do.
Thoughts? I would love to hear them. Email me at investmentinsights@zuckermaninvestmentgroup.com.
Written By Keith R. Schicker, CFA
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This article from Vox helpfully lists new year dates around the world.↩
Price return only, courtesy of Bloomberg, for all performance figures in this and other paragraphs.↩