Investment Mistakes to Avoid: Calendar Year Accounting of Returns

The end of a year is a fine time to take stock of your life. Was it a good year (2020, ugh…) or could things have gone better?

That’s where New Year’s resolutions come from, naturally. Our propensity is to take turning points in time as a chance to start over or change course.

Thus we tend to get sent annual reviews of investment portfolio returns by financial advisors, along with explaining if gains are subpar and crowing if things went better than expected.

And that’s where the investment error creeps in. Does it make sense to pick one day a year — December 31 — to look back and judge our investment decisions? Why not July 31? Or September 1?

If you look at your accounts online you are likely to find these snapshot reviews on at least an annual basis, and there at least is some logic to the practice.

Trading naturally slows down at the end of the year as Wall Street goes on holiday and small investors focus on family time. It slows down in summer as well as vacations start up, but we tend to just think of that as a lull, not a moment of reckoning.

So the pros take holiday time to reorganize portfolios, sell things for tax purposes and send out thought pieces with titles such as “10 Stocks for the Coming year” and so on.

If you drill down into the actual mechanics of it, however, you will find that many investment firms really track rolling periods of time — the trailing 12 months, or trailing three years, five year and 10 years.

This happens because technology makes it cheap and easy to calculate on the fly. And doing so is a far more honest way to look at performance.

After all, research has shown that a small number of very good days in a given 12 months often makes the difference between a winning or losing year. A portfolio that looks weak in December might look like a world-beater by the end of March and then just okay a month after that.

Rolling returns

Rather than worry about specific 12-month periods, you’re much better off thinking about longer stretches of time. Nobody buys a home thinking about how much it might go up in value in 12 months. But they do expect to have a positive equity position within five years of buying, for sure.

Likewise, it’s better to check in on your rolling return averages from time to time but over long periods, such as three-year windows at least, then compare that result to a fair benchmark. If you’re long large company stocks, compare your number to S&P 500 Index. If you own a mix of bonds and stocks, find a benchmark that combines those assets in the same way.

What you’ll find is that returns are quite variable and beating benchmarks is hard. The only things an investor can really control for is exposure to risk (and thus reward), the cost of investing (keep it as low as possible) and the tax implications of your investment choices (tax-deferred vs. taxable).

Everything else is equal parts luck and persistence.

MarketRiders, Inc. is a registered investment adviser.  Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.  Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.