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What a Difference a Year Makes


Each January Callan Associates, a major US investment consulting firm, puts together a set of capital markets assumptions for the upcoming year and beyond. One chart shows the difference in trailing investment returns based upon the most recent year-end and the prior year-end. In this case we are looking at 2009 and 2008.

Looking at the comparative trailing returns for three stock indexes shows the impact of the precipitous market declines of 2008 and the market rebound of 2009 on trailing returns.

The Russell 3000 index is often used as a proxy for the US stock market. A look at trailing five, ten, and fifteen year average annual returns for the index as of both 12/31/08 and 12/31/09 reveals:

5 years
10 years 
15 years 
As of 12/31/08 
As of 12/31/09 

Incorporated within are returns of -37.31% for 2008 and 28.34% for 2009.

The impact is similar when looking at the Russell 2000 index, an index of small cap domestic stocks:

5 years 
10 years 
15 years 
As of 12/31/08 
As of 12/31/09 

Incorporated within are returns of -33.79% for 2008 and 27.17% for 2009.

A look at the MSCI Emerging Markets index shows an even wider variation year-to-year:

5 years 
10 years 
15 years 
As of 12/31/08 
As of 12/31/09 

Incorporated within are returns of -53.18% for 2008 and 79.02% for 2009.

If you were an index fund investor in funds tracking these indexes over these time periods the above would approximate your returns. Where the year-to-year variations in trailing returns may be much more pronounced are in many actively managed mutual funds and ETFs as well as in many individual stock holdings.

Looking at the Russell 3000, if you had invested $10,000 here on 1/1/94, you investment would have been worth $25,216 on 12/31/08.

If you had made the same investment on 1/1/95 and held until 12/31/09, that $10,000 investment would have been worth $32,299, a difference of 28% over the same $10,000 investment made a year earlier and sold year earlier.

Both examples are hypothetical as investors cannot buy any index directly. None-the-less, it does illustrate the difference a year can make when looking at trailing investment returns.

One year good or bad should not be the deciding factor in whether or not a mutual fund or any investment vehicle is appropriate for your portfolio.  In evaluating investment performance an investor should take a number of factors into account. Investing is a long-term endeavor; investments need to be evaluated over longer time periods as well.

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  1. It sure feels better one year later!

  2. I agree with Susan. Last year was a nightmare. Investors are best served at looking at the long term, but 2009 was enough to scare many of them off.

  3. Susan and Suzanne my thanks to both of you for your comments. Investors need to look at the longer-term picture. It certainly "feels" better than Feb-Mar of 2009. This doesn't mean market risk has subsided, the fact that many of the "experts" on CNBC seem to think we are in rally mode really scares me. A key point of the post was to point out how a single year can sometimes impact a fund's trailing returns and that investors need to look at a battery of measurements when evaluating an investment option.

  4. This is a good post. It helps illustrate how performance statistics can change or be manipulated by picking and choosing a certain period (i.e., to highlight short or long-term good or bad performance) to suit the message being sent. For example, if a mutual fund wants to highlight good performance, they can pick a period of over-performance in their advertising. If they want to "knock" an asset class or competing investment, they can pick a period of low performance to highlight under-performance. Don't believe me? There's a book out there called "How to Lie with Statistics."

  5. Thanks for the comment Sam. Your points are so true.

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