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Here's a statement of the obvious: The opinions expressed here are those of the participants, not those of the Mutual Fund Observer. We cannot vouch for the accuracy or appropriateness of any of it, though we do encourage civility and good humor.

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Why Performance-Chasing Investors Will Love The New 5-Year Rolling Averages

FYI: Investors are constantly reminded to not base future investments on past returns, but the fact that most still do could provide a boost for the markets, according to Jeffrey Kleintop, chief global investment strategist at Charles Schwab & Co.
With the volatile summer of 2011 having rolled off the five-year trailing performance calculations, Mr. Kleintop is expecting investors to feel better about putting more money to work in the markets.
Regards,
Ted
http://www.investmentnews.com/article/20161027/FREE/161029918?template=printart

Comments

  • I've made this point before. Trailing 1-, 3-, 5-, pick a number-year returns are absolutely worthless. Investors fixate on them way too much and lose sight of the bigger picture - it's why we get in and out of the market and good managers at precisely the wrong times.
  • Hi JoJo26,

    Thanks for your comment.

    While I agree with you that the emphasis on multi-year returns performance is sometimes overemphasized when making an investment decision, I believe that it is a contributing factor to that decision and is not a worthless parasite.

    Past performance in any industry is typically useful in estimating (perhaps guesstimating would be a better word) likely future performance. For a ball player earlier hitting or pitching success gives some insights into future success. For a book writer, earlier sales records are grounds for money advances. Yes there is risk.

    The S&P Persistence Scorecards measure that risk for mutual fund managers, and it is not a pretty picture. Persistence erodes rapidly, but it does take a little time. Here is a Link to the S&P reference:

    https://us.spindices.com/documents/spiva/persistence-scorecard-january-2016.pdf

    I certainly agree that other factors are important when selecting a mutual fund to supplement performance history. Cost is always a significant part of that decision criteria list. So is the tenure of the managers and the stability of their investment process.

    What percentage of their portfolio departs from an Index equivalent also guides the decision. And the aggressiveness of that management in terms of their portfolio turnover ratio and its market Beta are additional considerations. It gets complicated quickly since the weighting of these many factors is different for different folks.

    Additionally, how well any one mutual fund integrates into a portfolio of many mutual funds also enters into the equation for us individual investors.

    Indeed, many factors influence a mutual fund purchase decision, but I would definitely not exclude past performance. Historical numbers help support decision components that are more subjective, and perhaps even emotional. So we do need a little luck and must monitor our decisions continuously. Change happens.

    Best Wishes.
  • I'm not saying performance should be excluded from the decision..... Rather, I'm saying that there should not be such an emphasis on the trailing returns at any one point in time. Clearly, no matter how much you may like a manager's process, how stable or tenured the team is, you aren't going to invest in a fund that perpetually trails the index its measured against.
  • HI JoJo26,

    Apparently I misunderstood your position, at least in terms of emphasis. We are in substantial agreement.

    In investing there is an issue of too much information; some tendency towards paralysis by analysis. There is a famous study of horse-race handicappers that demonstrated that debilitating characteristic.

    The handicappers were given tons of horse performance data. Initially they were tasked to handicap a race using only 5 bits of data for each horse that they selected. The challenge was repeated with 10, 20, and 40 pieces of individually selected data. The handicappers winner accuracy score did not improve with increasing data, but their confidence levels falsely did.

    Some decision making experts believe that we can not process too much info when forming a decision. I'm sure the number varies with each person and for differing circumstances, but these experts have concluded that an information overload takes control at about the 7 piece level. I suspect that finding is highly controversial. I find that observation uncomfortable since I am a member of the more is better cohort.

    Thanks for your post and your patience.

    Best Wishes.
  • Here is a simple trick question, posed by Meb Faber this week, using real world data, whose answer is supportive of what @JoJo26 was getting at with her comment.
    http://mebfaber.com/2016/10/26/which-investment-do-you-prefer/
  • Hi Heessafe,

    Thanks for the Link to the Meb Faber article. It greatly surprised me in a negative way. The data that Faber referenced in his article summarized surveys of institutional money managers.

    I am shocked by their unrealistic forecasted portfolio returns. If they set these expectations as benchmarks and compare their actual performance against these high benchmarks, very few will score themselves as successful managers. I doubt they tout this measurement outcome.

    These institutional managers score themselves using a variety of criteria. Nothing unusual here. But their number One goal and measurement criterion is indeed returns performance. Other criteria are less popular among this elite group.

    The article generates a bad impression of these investment pros. I'm sure that is not a universal truth. In a competitive marketplace, consistently poor performance would not be tolerated and survival would be unlikely.

    A great example of survival failures is illustrated in the S&P Scorecard that I referenced earlier. Poorly performing mutual funds simply do not survive. The bottom quartile in the S&P study exhibit a high death rate. Performance does matter.

    Compared to the institutional money managers we amateurs are not doing too badly at all.

    Best Wishes.

  • More like why the fund marketing departments will love these rolling averages. Remember how responsible FAs and others (ie, MFO readers) were saying in 2013 beware of the 5 year returns being hyped once the '08 crash 'fell off the radar' on that chart? People will still get suckered in by awesome 5-year returns, I bet. ;(

    Speaking of returns, I still chuckle that many funds and pension offices still assume a 5 or 7 percent annual return in their projections. Really, still? What are they smoking?
  • Hi Rforno,

    Thanks for your post. Not all professional organizations are smoking the high flier weed. Vanguard is definitely not in that group with a much more subdued projection of market returns.

    Here is a Link to a short Vanguard video that briefly summarizes their modest market expectations:

    https://personal.vanguard.com/us/insights/video/3693-Exc1

    Enjoy. I sure wish they had hired a chief economist who spoke more clearly. But I'm even more sure that their forecasts are based on solid available data and sound economic principles.

    Now if we could only model group emotional behavior we might have something much more reliable. Forget it! That's a reach beyond our grasp now and forever.

    Best Wishes.

  • MJG - good points. I sure wasn't intending to paint all fund companies w/that sentiment! Some, like VG, TRP, and others, are indeed quite responsible in such outreach, I think.
    MJG said:

    Hi Rforno,

    Thanks for your post. Not all professional organizations are smoking the high flier weed. Vanguard is definitely not in that group with a much more subdued projection of market returns.

    Here is a Link to a short Vanguard video that briefly summarizes their modest market expectations:

    https://personal.vanguard.com/us/insights/video/3693-Exc1

    Enjoy. I sure wish they had hired a chief economist who spoke more clearly. But I'm even more sure that their forecasts are based on solid available data and sound economic principles.

    Now if we could only model group emotional behavior we might have something much more reliable. Forget it! That's a reach beyond our grasp now and forever.

    Best Wishes.

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