Maintain Some Perspective When Evaluating Historical Investment Returns

September 4, 2018
In the world of professional investment advisors, the phrase “Past performance is no guarantee of future results” is a staple (or should be) within client conversations, literature and most any other form of communication with the investing public.  There’s a good reason the regulators are so adamant in preventing financial advisors from misleading the unwary investing public by touting an investment’s past success – it’s not all that hard at times to cherry-pick data in order to persuade a prospect that their future investment returns could be stellar, based upon what that investment has done in the past.

Like everyone else, advisors want to forget the Great Financial Crisis (GFC) of 2008 and the abysmal investment returns that occurred that year.   When advisors, fund representatives or even individual investors themselves review historical returns of an investment, what occurred in 2008 usually looms large in several places; in the multi-year period performance figures (usually 3-year, 5-year, 10-year or “since inception” results), in the “Best/Worst” performance results for a 3-month, 6-month or full-year period, or in historical returns “by year”.

Often though, performance reports may limit their listing of past performance at 10 years (‘since inception’ is too general and ambiguous to be useful).  This is where the passing of 2018 becomes significant.  As occurred after 2011 for the 3-year returns and in 2013 for 5-year period returns, after 2018, the 10-year return averages for investments such as mutual funds will see the horridly negative results for 2008 fall out of the equation and may offer a little boost to the 10-year historical results.  In addition, investors need to be aware that the general US stock market has been on a bit of winning streak; as measured by the unmanaged S&P 500 index, there have been no down years since 2008.  In 2011 the S&P 500 returned 2.11% and in 2015, the return was 1.38% (Source:, but otherwise, in each year from 2008-2017, a potential investment in S&P 500 index delivered double-digit returns (but of course, there’s no guarantee of a repeat!). 

The point here is that an investor looking at these returns next year might be unaware that they’re seeing results during a historic 10-year bull market and uptrend (assuming we end 2018 on an up-note).  The fact that markets do, in fact, go down and sometimes severely may be lost on such individuals unless someone (like an ethical advisor), point this out to them (perhaps using 2008 as an illustrative example).  Markets can also be volatile in a year, but end up with mediocre returns at the end (as in 2011 and 2015, but also 2005 and 2007).

So when evaluating investment returns as part of your due diligence research, go beyond the published numbers on the “quick fact sheet” and dig a little.  Get a little more perspective and be thoughtful about whether the investment is relatively new or whether it (and the portfolio manager behind it) has some “battle scars” to show.  This also goes for the relatively new, (but highly touted and popular) Exchange-Traded Funds (ETF’s) which have yet to participate in full blown market decline or bear market.