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Picking Cherries and Stocks

July 1, 2019

|Daniel A. White

We’ve all seen the disclaimer about past returns not predicting future performance. As investors we’re delivered that line ad nauseum.

But it’s conveniently forgotten by people in the financial industry.

They throw around past performance numbers like crazy, especially when it makes them look good. And you can expect that chatter to roar louder.

Why?

The industry benchmark is often 10-year average returns. And in April 2019, a whole bunch of terrible returns “aged out” of the 10-year performance window.

So remember this – when you hear someone discuss the greatness of their stock picks over the last 10 years, they might be patting themselves on the back because time went on.

In mid-May the S&P 500 index had a 10-year average of 14.7 percent.

But if you took that same measurement at the end of December 2018, the 10-year average return was 8.5 percent.

Look at how the second chart begins and ends. Change three months and the average return jumps 6.2 percent!

It’s cherry picking at its finest. Just lop off a few horrendous months from 2009 and watch the rocket take off because many investors base decisions on the 10-year average return.

However, the “golden decade” of past performance is misleading. People may honestly think they’ll get almost 15 percent per year on average going forward.

But the truth is, it gets uglier the farther back you look. The average annual return over the past 20 years that ended in April 2019 was 6 percent (because of two bear markets).

However, there is hope. If you go back to 1928, the annualized return is 11 percent. If you’ve held stock since then, fantastic!

In all seriousness, the point is that time period matters. So be skeptical of salespeople claiming great returns over the past decade.

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