I opened my Vanguard statement a couple of months ago. It was more fun than the same exercise a year ago.
I fixed on the 10-year annual return — Jan. 1, 2009, to Dec. 31, 2018 — of the Vanguard S&P 500 Admiral index fund.
It was a 13 percent gain (with dividends).
In January 2018, the statement said the 10-year annual return was 8.5 percent.
That’s a more-than-four-percentage-point difference, an improvement of more than 50 percent.
In just one year, I went from a decent 8.5 percent return over a decade to a double-digit number that is worth dropping into any lunch with some noble from the moneyed class — of which I am not a member.
So what happened?
As we celebrate the 10th birthday March 9 of this roaring bull market that has created stock price gains and dividends have added $21 trillion to the S&P 500, I began to think through just how we got here.
I realized that the year 2008, when the S&P lost a whopping 35 percent, had fallen off my statement’s 10-year calculation for annual returns that began Jan. 1, 2009.
One year — 2008 — was dropped from the calculation, only to be replaced by 2018. The investment industry calls this “rolling off.”
Good riddance: 2008 dragged down the entire return for the current bull market we are celebrating.
The first quarter of 2009 didn’t help, either. That took the Standard & Poor’s 500-stock index down another 11 percent, before the big bull market began to snort.
Those of us who have held on during this period are not geniuses. But we are patient.
The cautionary tale here is that these rolling periods are just calculations.
Throwing in one crazy year and throwing out another can distort your returns — and your emotions along with them.
The three-year, five-year, 10-year periods give you a better long-term perspective on how you are doing with your investments. As time passes, you roll off one year and roll into the next. Thus “rolling” returns.
“Letting past returns — even longer-term returns — impact your investment decisions is likely a mistake,” said Don Bennyhoff, senior investment strategist at Vanguard. “Too often, better-than-average returns lead investors to increase their allocations to stocks, ignoring the added risk that comes with them. That rarely ends well.”
We aren’t done yet.
April will bring another quarterly statement. If the first quarter of 2019 continues to be a good one, that 13 percent annualized return over 10 years might look even better.
Ironically, at the beginning of this 10-year period, people were still talking about a lost decade due to poor returns. They piled into bonds and cash.
I wasn’t one of them.
I called Dan Wiener, an investor who also runs a newsletter called the Independent Adviser for Vanguard Investors. He manages about $5.5 billion for his clients.
I have been a faithful reader of the newsletter for years, and I asked Wiener about the phenomenon of “rolling returns.”
Wiener’s advice: Manage your expectations.
“The last ten years has been miraculously free of excessive volatility while stocks compounded at a prodigious rate,” he said. “Investors shouldn’t expect to see a repeat anytime in the near future.”