The Tyranny of the Calendar

We are all beholden to the tyranny of the calendar.  Monthly or quarterly account statements tie a nice bow on a period of time, but can lend false significance to a time period’s returns.

If you’ve got a brokerage account or 401(k), you probably got a statement ending on 6/30/2016.  As of the quarter end, the S&P 500 was up 3.99% over the past 12 months and 12.09% annualized over the past 5 years (77.02% cumulative).

What if we look at the same performance, but ending a month later on 7/31/2016?  As of the end of July, the S&P 500 was up 5.61% over the previous 12 months and 13.37% over the past 5 years (87.36% cumulative).  What a difference a month can make!

If statements were cut on 8/5/2016 we’d see an even bigger leap.  As of Friday, the S&P 500 was up 6.29% over the last 12 months and 15.18% over the past 5 years (102.77% cumulative).  A huge gap just from shifting the time period by a month and a week.

Of course, this is a mirage.  By shifting the time periods, I cut off a couple of very bad time periods and added in a couple of very good time periods.  An investor looking at just one of these return streams by itself would come to different conclusions than an investor who sees the bigger picture.  This is something I am keenly aware of when interviewing money managers.  They often highlight very specific time periods where their fund looks awesome with sometimes flimsy reasoning (“our fund outperforms when Janet Yellen’s collar is popped during Congressional testimony”).  The calendar gives us a standard frame of reference to hopefully prevent some of that data mining, but it is important to recognize that, especially over short time periods, the calendar can cloud our view of what’s going on.

By the way, how has the S&P 500 done so far this year?  The index was down over 10% through February and lost over 5% in reaction to the Brexit vote.  Despite those hiccups, the S&P 500 was actually up 8.19% through the market’s close on Friday, 8/5/2016.

Photo by DafneCholet