Why performance-chasing investors will love the new 5-year rolling averages

The flipside is the 3-year averages are getting worse

Oct 27, 2016 @ 12:14 pm

By Jeff Benjamin

Investors are constantly reminded to not base future investments on past returns, but the fact that most still do could provide a boost for the markets, according to Jeffrey Kleintop, chief global investment strategist at Charles Schwab & Co.

With the volatile summer of 2011 having rolled off the five-year trailing performance calculations, Mr. Kleintop is expecting investors to feel better about putting more money to work in the markets.

Speaking earlier this week in San Diego at the annual Schwab Impact conference, he described the potential of a “sleeper positive for the markets.”

“The five-year numbers now look good because we've dropped off that horrible summer of 2011 that included the debt-ceiling debacle,” he said. “We've gone from a 10% trailing five-year return to a 50% five-year return. And as we get past the presidential election investors might start looking in the review mirror and decide to put some money to work.”

The fact that such a strategy goes against the grain of most prudent financial advice doesn't really matter, because Mr. Kleintop is acknowledging an investment-psychology given that investors chase performance.

“There's been virtually no volatility since 2011, and once you roll out of that summer everybody's numbers will look better,” said Mark Travis, president and chief investment officer at Intrepid Capital.

However, the flipside of rolling off the summer of 2011 on the five-year performance, is the gradual rolling off of the strong 2013 performance on the three-year returns.

The deeper we move into 2016, the more trailing three-year performance is lost from 2013, when the S&P 500 Index gained 32.4%.

Daniel Wiener, chairman and chief executive of Adviser Investments, said the investor psychology related to the three-year returns could potentially offset the upside potential of the better-looking five-year returns.

“The three-year number seems to be the number that matters so much to the rating agencies and the media,” he said. “And investors have been trained to look at the three-year number.”

Even though the S&P is up 6.5% so far this year, the rolling off of 2013's performance could mean the end of October will result in the first single-digit three-year annualized return for the S&P since 2011.

“My argument for a very long time has been that these kinds of point-in-time numbers are useless, because they only refer to a single point in time,” Mr. Wiener said. “But, we know from investor psychology that people will look at these numbers and say they haven't gotten double-digit returns over the trailing three years.”

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