Checking Investment Statements Frequently can be MisleadingStuart Kirk, CIM®, Wealth Advisor
Media coverage of short-term market volatility is prompting people to worry about their investments. Market analysis of past, rolling return holding periods helps to shed some light on these fluctuations, and how we should respond. And our response is typically to do nothing.
Do Nothing? Data Analysis Tells the Story
Here below shows data representing rolling return holding periods from Bloomberg LP for the S&P 500 from January 1, 1928 to June 30, 2018 (the past 90 years). The idea behind using rolling returns is to measure not just one block of 3- or 5- or 10-year period, but to take several such blocks at various intervals and see how the market performed over those periods.
In other words, the 1-year rolling periods are calculated as follows: Jan 1 1928 to Jan 1 1929, Jan 2 1928 to Jan 2 1929, Jan 3 1928 to Jan 3 1929 and so on. The reason we look at data this way is that it gives a true representation of holding periods that are all literally 1 day apart. We then look at the total holding periods for a specific time period (e.g., 1-year term) from 1928 to 2018 and determine how many of those 1-year periods were negative. Here are the results:
As you can see from the table, if you check your account daily, then 46% of the time it will more than likely be negative. If you check it yearly, then probably 26% of the time it would be negative. Checking it only every 5 years means that the chance of it being negative is only 12%.
Short-Term Viewpoints can Lead to Bad Investment Decisions
Now, we know it is not realistic to ask our clients to check on their accounts every 5 or 10 years—that is not our expectation. This data tells us that short-term viewpoints can lead to bad investment decisions, and bad investment decisions can dramatically affect mid- to long-term performance. This data also tells us that spacing out portfolio surveillance increases the likelihood of positive returns. The Key? Invest for the long-term, and try not to worry so much about short-term market volatility.
Having said all this, the next time you call your advisor when your account is negative over the last few months and ask, “What are we going to do?” Don’t be surprised if the answer is “nothing.”