Why peer through a peephole when you can look out a picture window? That's what we wonder when we see investors peering through a narrow window at just one year’s fund or market results. Whether the results are good or bad hardly matters -- it's that the view itself is distorted by the narrow dimensions. By looking through a bigger window at 10, 20, or even 100 years of results, the picture suddenly becomes clearer.
It's always wise to ask yourself what window you’re being asked to look through by any provider of financial services. This is true whether it's a website or a mutual fund ad or an individual stockbroker. Ask yourself why they're having you focus on THIS particular timeframe. If it's 1 year instead of 5 or 10, are they trying to influence your decision by emphasizing only the most stellar results over a short period of time? (Hint: yes.)
Even with rolling averages the timeframe can make a big difference. From 1997 to 2007, for example, the S&P 500 returned 8.14% on average. But if you roll forward just one year and look at 1998 to 2008, the results change dramatically to 0.96% on average. That’s an enormous difference based solely on timeframe.
The beginning of the Great Recession, of course, is the culprit in the second scenario. Two different analysts wanting to make two different points might choose the first timeframe if they wanted to emphasize positive results, or the second timeframe if they wanted to emphasize negative results. It helps to understand this when looking at news or posted results from any source, because the timeframe can alter the picture dramatically.
With regard to our own investment results, if we wanted to emphasize how well we had done, we might choose the 15-year period from 1992 to 2006 during which we actively invested for retirement. During that time the S&P 500 returned 10.66%. If instead we wanted to emphasize how many challenges we had faced, we might extend the window to 2008 to include our initial early retirement into the Great Recession. During that timeframe the S&P 500 returned 6.73%.
But the clearest and most honest picture is usually the biggest picture. With respect to our own investment results, the longest timeframe we can examine at present (from 1992 to 2017) shows an S&P 500 return of 9.62% – which happens to be fairly close to the long-term historical average of 9.15%.
The bigger the timeframe the better. Let’s say you’re trying to decide what annual percentage to use to estimate future stock market returns in your portfolio. Why not take the really long view? Moneychimp.com has a nifty calculator that allows you to enter 1871 as the oldest possible starting date for the S&P 500. So if we look at 1871 to 2017 (the latest available year), we get 9.15% as the annualized return based on compound annual growth rates.
If going back to the 1800’s seems too extreme, then from 1900 to 2017 the annualized return was 9.81%. The 100-year window (1917-2017) was 10.18%, the 50-year window (1967 to 2017) was 10.40%, and the 25-year window (1992- 2017) was 9.62%.
Based on these results we would recommend you use 9% as your predicted annual return for future years. That way your slightly conservative estimate is predicated on what might be called a widepan view of the market. When you consider how much turmoil this timeframe has encompassed – two World Wars, a Great Depression, a Great Recession, and much more – it’s a comfort to realize that, in spite of it all, the stock market has still returned more than 9% on average per year.
Taking the longest possible view over the longest possible timeframe cuts down on the chatter from TV pundits and day traders. It makes you realize maybe this isn’t such a gamble after all. Maybe the stock market is more reliable over the long term than you have been led to believe.