As a professional copywriter, I find it fascinating how trailing one-year stock market returns can experience a significant jump of over 25 percentage points simply by updating calendar quarters. This may sound unbelievable, but it’s absolutely true.
The recent change in the end date of the trailing year, from March 31 quarter to the June 30 quarter, has made a remarkable difference in one-year total returns. These returns encompass both price changes and reinvested dividends.
Let’s take a look at the table below to see the impact of this change on Vanguard’s S&P 500 and Total Stock Market index funds. As you can see, Vanguard’s S&P 500 and Total Stock Market index funds have experienced a surge of 27.3 percentage points and 27.7 percentage points, respectively.
(A brief aside: I’ve used numbers for Vanguard index funds’ Admiral share class, including fees and other costs. This approach allows us to showcase the actual gains that investors have received, rather than merely focusing on price changes. Vanguard has been selected for this demonstration because it holds the position of the nation’s largest mutual fund company.)
Now, it’s important to note that I’m not highlighting these gains to revel in the success that millions of investors (including myself) have enjoyed – though they have undoubtedly been delightful. The FT Wilshire 5000 Index indicates that the market value of U.S. stocks has risen by $6.2 trillion over the past 12 months, with an impressive $3.5 trillion increase during the second quarter.
Instead, my intention is to bring attention to the volatile nature of trailing one-year numbers. We shouldn’t become excessively optimistic or profoundly pessimistic based solely on these figures because they can undergo significant changes from one quarter to another.
The Importance of Looking Beyond Trailing Numbers in Investment
As a retail investor, it is essential to have a long-term vision when it comes to the market rather than trying to time it. This perspective is crucial to avoid being overly affected by negative trailing numbers, as was the case a year ago, and to resist the temptation to invest heavily when things are going well, as they are currently.
According to Daniel Wiener, chairman of Adviser Investments of Newton, Mass., “Point-in-time performance numbers are irrelevant.” It is important to take them with a grain of salt, or perhaps with a saltshaker full.
Until recently, I hadn’t given much thought to trailing one-year return numbers. It wasn’t until I read a note from Wiener, where he predicted a significant change due to the shift between this year’s second quarter and last year’s, that I realized how much year-over-year returns can be altered simply by changing calendar quarters. This realization further emphasized the fact that wise investors should not become excessively fixated on these numbers.
Trailing numbers are just that – trailing. Unless you possess a time machine (which none of us do), you cannot invest in the past. Instead, you must focus on what you believe the future holds and make decisions accordingly.
A year ago, the trailing 12-month returns for the Vanguard S&P 500 and Total Stock Market funds were incredibly dismal at minus 10.7% and minus 14.2%, respectively. These figures were undoubtedly disheartening.
However, if you had the courage to stay invested and held on, you would have enjoyed a significant return – nearly double the average annual return of the S&P 500 since 1926 through the end of last year, which stood at 10.1%. Conversely, those who gave in to despair and sold missed out on this opportunity.
Investment decisions should not be solely based on trailing numbers, as they are just a small piece of the overall investment puzzle. It is crucial to maintain a perspective that looks beyond short-term fluctuations and focuses on long-term growth potential. By adopting this mindset, retail investors can navigate the market with confidence and ultimately achieve their investment goals.
The Takeaway
- Trailing numbers should be taken with caution and not given excessive weight in investment decisions.
- Changing calendar quarters can significantly influence year-over-year returns.
- Focus on the future rather than the past when making investment choices.
- The Vanguard S&P 500 and Total Stock Market funds experienced a substantial rebound after a period of negative returns.
- Long-term vision and resilience are key in achieving investment success.
The Art of Long-Term Investing
The recent 12-month returns in the stock market have been nothing short of impressive. However, these gains did not come easily or quickly. A significant portion of the increase can be attributed to the change in performance between the second quarters of 2022 and this year.
During the second quarter of 2022, both the S&P fund and the total market fund experienced significant losses, with returns of -16.1% and -16.9% respectively. Fast forward to this year’s second quarter, and the numbers have turned around with returns of 8.7% and 8.4% for the S&P fund and the total market fund respectively.
Bob Wiener, an investment expert, points out that the S&P’s one-year return saw a remarkable increase of over 23% in just 39 trading days between May 4 and June 30. Prior to this surge, the S&P fund had been in the negative territory for the trailing year.
Another intriguing observation is the difference in volatility between Vanguard’s Growth index fund and its Value index fund. As of June 30, 2022, the Growth fund had suffered a significant decline of 21.9% over the previous 12 months, whereas the Value fund only experienced a slight decrease of 1.9%. However, by June 30 of this year, the tables had turned. The Growth fund had soared by 28%, representing a swing of almost 50 percentage points, while the Value fund had a more modest increase of only 10.8%, a rise of 12.7 percentage points.
The direction of the stock market from this point onward remains uncertain. Attempting to predict its course is an exercise in futility, as even the experts are often proven wrong. However, what remains constant is the timeless advice on how to succeed as a long-term retail investor.
First and foremost, it is essential not to succumb to despair during market downturns. Similarly, one should avoid becoming excessively exuberant when stocks are on the rise. Emotional resilience is just as valuable as financial resources during these volatile times. Being able to weather the storm without losing focus or making rash decisions is crucial.
Moreover, it is crucial to exercise self-control and not become overly infatuated with the market during periods of growth. It is easy to fall prey to the belief that you are a genius investor when stocks are performing well. However, it is important to remain level-headed and recognize that market trends can change rapidly.
In conclusion, the key to successful long-term investing lies in staying the course and managing emotions effectively. By adhering to these timeless principles, investors can navigate the ever-changing landscape of the stock market with confidence.
