Do We Focus Too Much on Returns?

When you’re thinking about investing money do you focus too much on the historical trailing returns of the investment you are researching? It is ok if you do it, guess what I do it also! The real question is should we? Well it depends on what returns we focus on. Make sense? Let me explain.

Trailing returns are the typical go to benchmark for investors and advisors when reviewing performance. But should they be? Martha Norton, CFA and Investment Manager with Morningstar Investment Services believes trailing returns are over used, misunderstood, and do not tell the whole story. I completely agree. Martha does a great job analyzing different trailing return periods, which I will summarize for you.

The real problem with trailing returns is what trailing time period are you reviewing? The most popular trailing return time period, is five years. The problem with only looking at five years, is what market cycle they represent. Sometimes it represents a full market cycle, but more often than not it represents directional markets. Meaning a bull or bear market.

The table below represents trailing five-year returns for major stock markets that end just before the financial crisis, it includes the 2008 bear market, and the trailing bull market returns that begin in 2009. The four different time periods represent 5 year trailing returns, however look at how different the results are. For example for the S&P 500 returns range from -2.19% to positive 17.94%.  Also look at what happens to the emerging-markets returns when we move the five-year end date from 2007 to 2008, over 30% difference. Crazy, I know!

Trailing Returns Chart

When working with clients I always tell them it is more important that your strategy is allocated properly to take advantage of the current and future market environment, then what happened in the past. Does that mean you should not pay attention to trailing returns? Of course not!

So what trailing return should I be researching? At least 10 years or longer, the real key is the trailing period represents one complete market cycle. Of course we always put a large emphasize on the risk adjusted return.

As always with investing there is never one clear cut strategy or rule. The only right way to invest is to always understand what you are investing in and make sure you understand the fees and they are transparent.

Joe Carbone, Jr.

Work with Us

Start the conversation about your financial future and schedule your 30 minute complimentary consultation. You can reach us directly at 631-714-6044, click to schedule a meeting.

About the Author: Joseph Carbone, Jr.

Joe jr standing up 151 x 100

Joseph A. Carbone, Jr., is a wealth advisor and partner of Focus Planning Group. Joseph is an accomplished wealth advisor with extensive experience in portfolio management/research, financial planning, employee benefits, client relationship management, and insurance design. Joseph holds a bachelor’s degree in finance from Dowling College and obtained the Certified Financial Planner™, Accredited Investment Fiduciary®, and Accredited Asset Management Specialist℠ Designations.
You can contact Joseph via email or social media;