About the author: Allan Sloan is an independent business journalist and seven-time winner of the Loeb Award, business journalism’s highest honor.
Would you believe that trailing one-year stock market returns can jump by more than 25 percentage points just by updating calendar quarters? Well, you should believe it, because it’s true.
Changing the last quarter of the one-year trailing period to the recently completed June 30 quarter from the March 31 quarter has made an enormous difference in one-year total returns, which include price changes and reinvested dividends.
As you can see from the table below, Vanguard’s S&P 500 and Total Stock Market index funds’ one-year total returns have risen by 27.3 percentage points and 27.7 percentage points, respectively, as the result of changing the end date of the trailing year by three months.
(A brief aside: I’m using numbers for Vanguard index funds’ Admiral share class, which include fees and other costs, to show how much investors got rather than just showing you price changes. I picked Vanguard because it’s the nation’s biggest mutual fund company.)
I’m not writing this to celebrate the gains that millions of investors (including me) have made, delightful as they’ve been. The FT Wilshire 5000 Index says that the market value of U.S. stocks has risen by $6.2 trillion (to $46.3 trillion) during the past 12 months, including $3.5 trillion in the second quarter.
Rather, I’m writing this to show why we shouldn’t get either carried away or megadepressed by trailing one-year numbers, because they can change sharply from one quarter to the next.
So if you, like me, are a retail investor planning to stay in the market for an extended period rather than trying to time it, you need to guard against getting too upset when the trailing numbers are sharply negative, as they were a year ago, and you shouldn’t be eagerly shoveling all your money into the market when things are going well, as they are now.
“Point-in-time performance numbers are irrelevant,” says Daniel Wiener, chairman of Adviser Investments of Newton, Mass. “You have to take them with a grain of salt.”
Or perhaps with a saltshaker full.
I hadn’t thought much about trailing one-year return numbers until I read a note that Wiener sent out in mid-June predicting that the change caused by swapping in this year’s second quarter for last year’s would be huge.
Wiener’s note got me thinking about how just changing calendar quarters can alter year-over-year returns very sharply. And made it glaringly obvious that smart investors shouldn’t get too wrapped up in those numbers.
That’s because the trailing numbers are…well, trailing numbers. But unless you happen to have a time machine available, which none of us do, you can’t go back and invest in the past. You have to deal with what you think the future will bring, not with what the past has already brought.
A year ago, the trailing 12-month returns for the Vanguard S&P 500 and Total Stock Market funds were minus 10.7% and minus 14.2%, respectively. Yukko. Very depressing.
If you sucked up your gut and left your money in the market and hung on, you made a very nice return, almost double the S&P’s 10.1% average annual return from 1926 through the end of last year. If you gave up and sold, you missed out.
But the current big-time 12-month return didn’t come easily or quickly. Most of it came from changing second quarters from the second quarter of 2022 (when the S&P fund’s return was minus 16.1% and the total market fund’s return was minus 16.9%) to the second quarter of this year (when the numbers were plus 8.7% and plus 8.4%, respectively).
Wiener says that in the 39 trading days from May 4 to June 30, the S&P’s one-year return rose by more than 23%. Before that surge, the S&P fund was negative for the trailing year.
Another interesting fact is how much more volatile Vanguard’s Growth index fund has been than its Value index fund. As of June 30, 2022, the Growth fund was down 21.9% for the trailing 12 months, but the Value fund was down only 1.9%. As of this past June 30, the Growth fund was up 28%—a swing of almost 50 percentage points—and the Value fund was up only 10.8%, for a rise of 12.7 percentage points.
Where does the market go from here? I don’t know, nobody knows. However, I do know that the rules about how to succeed as a long-term retail investor are what they’ve always been: Don’t get too depressed when markets tank; don’t get too exhilarated when they rise.
Make sure that you’ve got the financial—and emotional—resources to make it through down markets without freaking out or bailing out. And try to have enough self-control not to fall in love with the market (or consider yourself a genius) when stocks are rising.
That, as always, is the bottom line.
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