We see a similar difference with two years of difference in our snapshots, from 2020 through 2022. Taking a look at the S&P 500 again, the 1-year return has come back down from the stratospheric 56.35% figure in 2021 but was still a hefty 15.65% in 2022. While advisors may not base their long-term plan decisions on 1-year numbers, investors can often anchor their expectations to these numbers, causing them to regularly check in to make sure they’re reaching or “beating” the benchmark. Those are some high expectations to meet.
The S&P 500’s 3, 5, and 10-year returns for 2022 are all fairly in line with the respective 2021 returns, while the YTD as of March 2022 has turned negative. Meanwhile, the Bloomberg U.S. Aggregate returns are turning worse and the year over year numbers for the various intervals are showing more dispersion and dropping across the board.
When the performance conversation arises, framing the evaluation around short-term trailing returns can lead to defining success or portfolio changes based on too short a time frame. Whether we’re looking at 1-year trailing returns one year apart or considering the 1-, 3-, or 5- year returns in any given snapshot, the numbers are often vastly disparate and inconsistent, potentially skewing the returns expectations of investors and complicating long-term financial plan construction.
Couple that with short-term market noise and commentary, and investors can become all too eager to jump from one investment to another, chasing higher returns based on trailing 1, 3, and 5-year numbers. Further, investment or manager selection based on short-term trailing numbers can lead to disappointment or worse, unmet financial plans and goals.