Don't let a trick of the calendar alter your course

January 24, 2014

 

When making investment decisions, it's important to weigh past returns with caution. That's because investment returns from any particular period are an unreliable anchor for gauging the future. They can be highly date-dependent.

For example, take the five-year average annual return for the broad U.S. stock market, as measured by the Russell 3000 Index. That average just made a startling bounce: from 2.04% for the period ended December 31, 2012, to 18.71% for the period ended December 31, 2013. True, the market returned a hearty 33.55% in the most recent 12 months, but that's not enough to explain such a big leap in the average. Significantly, the 12 months ended December 31, 2008—when U.S. stocks returned –37.31% during the financial crisis—has now rolled off the five-year calculation.

Average annual returns for U.S. stocks over five-year periods ended December 31
200713.63%
2008–1.95
20090.76
20102.74
2011–0.01
20122.04
201318.71

Note: The U.S. stock market is represented by the Russell 3000 Index.
Source: Vanguard.

The important thing to remember is that historical returns are just that: historical. Basing investment decisions on such date-dependent snapshots could easily lead to an altered course—possibly in the wrong direction. Instead, Vanguard believes, asset allocation strategies should be built on long-term risk-and-return relationships, always recognizing that no level of return is guaranteed.

Notes:

  • All investments involve some risk, including the possible loss of the money you invest.
  • Past performance is no guarantee of future results.
 

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