We see a similar difference even with three years of difference in our snapshots. Taking a look at the S&P 500 again, in 2016 the 1-year return was 3.99%.
Here in June 2019 that figure has more than tripled to 10.42%. 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.
Source: Zephyr StyleADVISOR
The 10-year doubled in 2019, mainly because 2008 has fallen off the trailing 10-year. With this in mind, 10-year returns going forward in this long bull market will look quite high from a larger historical perspective.
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 at 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.