If you read this Blog on a regular basis, you know I like to write about what interests me most. That is definitely the case today. I doubt you’ll read what follows anywhere else, so let’s get started.
As investors, we focus on investment returns over various “time windows” – often 1-year, 3-year, 5-year and 10-year or even longer. The 10-year average return is one of the most important time windows since it gives us a picture of how an investment performed over different market environments – up markets, down markets, economic expansions and recessions. Most investors look at the 10-year average a lot.
As I will discuss below, the 10-year average returns for many investments and money managers are going to look a lot more attractive over the next several months, and you need to know why. Let’s take stock market indexes as the most obvious example.
We can all remember the stock bear market of late 2008-early 2009 when the S&P 500 Index plunged almost 50% in value. The worst months of that bear market were from September 2008 to February 2009. The point is:
The worst months of that bear market start falling out of the 10-year averages this month, and this will mean a big improvement in the 10-year performance averages just ahead.
Let me explain. Sticking with the stock market, let’s look at the S&P 500 returns from September 2008 to February 2009 when the US stock market plunged almost 50%:
| September 2008 | -8.91% | December 2008 | +1.06% | |
| October 2008 | -16.8% | January 2009 | -8.43% | |
| November 2008 | -7.18% | February 2009 | -10.7% |
Those terrible months of the late-2008 to early-2009 bear market are starting to drop out of the 10-year averages beginning this month and will continue for the next six months. This will cause the 10-year average returns to improve significantly over the next six months – assuming the market doesn’t plunge just ahead.
Why do I point this out? Because most investors don’t know this. But more importantly because most market analysts, fund managers and other money managers do know this – and will be touting the improvement in their 10-year performance in the months just ahead.
Let’s look at some numbers.
As of the end of September, the historical average annual return of the S&P 500 was 10.2% going back to 1926. Because we’ve had some really strong years recently, the 10-year average return of the S&P 500 was 12.6% at the end of September.
To illustrate how these bad months dropping off can affect the 10-year average return going forward, let’s assume the S&P 500 remains unchanged from the end of September to the end of February next year.
Take a guess at how much the 10-year average return improves as these bad months drop out of the calculation. Does it go up to 14%, 15%? No, it goes up to an amazing 17.1%! And that’s if the stock market remains flat for the next five-plus months to the end of February.
I point this out only because so many investors look at time windows such as the 10-year average return when making their decision to invest in the stock market, or add to their accounts. If so, they will likely see a significant improvement in the 10-year returns over the next several months.
Again, assuming the stock market is flat between now and February 28, the 10-year average return for the S&P 500 goes from 12.6% at the end of September to 17.1% at the end of February – just because some really bad numbers drop out of the calculation.
With that kind of improvement, you can bet that marketing people across the financial services industry will intensify their sales efforts. Virtually everyone who rode out the bear market of 2008-2009 will see their 10-year track records improve significantly in the months ahead.
That means stock mutual funds, ETFs, individual money managers, etc. will all be touting their latest 10-year average returns later this year and early next year. Trust me on this.
Yet it will all be due to some really bad months falling out of the rolling 10-year data, and presumably not because performance will have improved significantly just ahead, and certainly not because the risks have gone down.
In closing, I think I’ve adequately explained why the 10-year average return in stocks is going to improve over the next several months. But there is a greater point to be made here. That is:
If you can avoid some really bad months, your returns can improve significantly.
Space limitations don’t allow me to elaborate on this point today, but I’ll have more to say on this topic in Forecasts & Trends just ahead. You can sign-up for this free weekly E-Letter here.
I doubt you’ll see this anywhere else, unless you search for it. Remember, you read it here first.
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