When everything's going up, no one cares about performance. Guess what happens when everything's not going up?
It's probably not happening yet. But, very soon, it will. When all the markets are rising, no one talks about investment performance. That's probably a very mature thing to do.
If folks are talking about performance when everything's going up, that's likely a sign they are chasing performance, not their goals. That's a formula for disaster.
Of course, if it weren't for those people, we wouldn't have late-stage bull markets and there would have been no reason for anyone to have come up with the idea of “The Greater Fool Theory.”
When markets get choppy, people return to the study of performance analytics. That doesn't mean they're more mature. It also doesn't mean they're not chasing performance. All it means is that they're thinking about investment performance.
Maybe “thinking” isn't what they should do. Maybe they should be “rethinking” instead (see “Rethinking Performance Standards: Part I – The Fatal Flaw,” FiduciaryNews.com, November 13, 2018). And it's not just investors who should be doing the rethinking.
Decades ago investment advisers discovered nothing held them back from reporting performance using any arbitrarily determined period (as long as the period chosen made the investment adviser look good).
These periods could have been based on fiscal year, different quarter or month ends or, for those most creative, “market cycle.”
Sure, the market goes in cycles, but if you ask five different economists to set the beginning and end dates of any particular market cycle, you'd get at least seven different answers (and more likely fifteen).
When investment advisers morphed into mutual funds, they found the required investment performance reporting a bit more constrained. Out went the market cycle, but the ever moveable fiscal year remained.
That was until about fifteen years ago. That was when the SEC reformatted investment reporting on mutual fund prospectuses. No longer would funds be able to report performance figures across a spectrum of fiscal year ends (which mutual funds can change at will).
Today, all mutual funds must report performance figures based on the calendar year (but only in their prospectus–their annual reports show return figures based on fiscal year end).
On the face of it, this sounds extremely helpful. When the new reporting rules began, investors were finally able to compare mutual fund performance on an apples-to-apples basis. Sounds like a winner, right?
Well, it turns out the law of unintended consequences is a pretty stubborn law. What the static performance reporting has done is institutionalize the Snapshot-in-Time Anomaly.
This phenomenon covers up intra-period performance volatility. As a practical matter, this can have a tremendous impact on the return on regularly occurring investments – this means 401(k) plans. Think of this as an ongoing sequence of return risk for pre-retirees.
Here's the bottom-line: The actual performance experienced may not be correlated to what's seen on the standard 1, 5, and 10-year performance charts, even if you include the traditional sequence of individual annual returns.
This isn't one of those “past performance does not guarantee future results” warnings.
This pertains to the real past performance experienced. The SEC-mandated performance reporting simply does not reflect what a typical 401(k) saver sees in their asset growth.
It's time to rethink investment performance standards.
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Christopher Carosa
Chris Carosa has been writing a weekly article and monthly column for BenefitsPRO online and BenefitsPRO Magazine since 2011 and is a nationally recognized award-winning writer, researcher and speaker. He’s written seven books, including From Cradle to Retire: The Child IRA; Hey! What’s My Number? – How to Increase the Odds You Will Retire in Comfort; A Pizza The Action: Everything I Ever Learned About Business I Learned By Working in a Pizza Stand at the Erie County Fair; and the widely acclaimed 401(k) Fiduciary Solutions. Carosa is also Chief Contributing Editor of the authoritative trade journal FiduciaryNews.com and publisher of the Mendon-Honeoye Falls-Lima Sentinel, a weekly community newspaper he founded in 1989. Currently serving as President of the National Society of Newspaper Columnists and with more than 1,000 articles published in various publications, he appears regularly in the national media. A “parallel” entrepreneur, he actively runs a handful of businesses, including a small boutique investment adviser, providing hands-on experience for his writing. A trained astrophysicist, he also holds an MBA and has been designated a Certified Trust and Financial Advisor. Share your thoughts and story ideas with him through Facebook (https://www.facebook.com/christophercarosa/)and Twitter (https://twitter.com/ChrisCarosa).
