What a Difference a Year Makes!

January 28, 2008

It’s amazing how one year can impact the annualized rate of return of a longer period of time. To see what I mean, take a look at the two graphics below. The first one shows the annual returns from 1987-2006 of the indexes represented in Callan Periodic Table of Investment Returns that I reference fairly often on this blog.

The Callan Periodic Table of Investment Returns
Click on table for larger image

This graphic shows those same indexes from 1987 – 2007:

The Callan Periodic Table of Investment Returns
Click on table for larger image

Now, this graphic shows you how 2007’s returns impacted the annualized rate of return (also called the geometric average) for the indexes:

As you can tell, last year’s mediocre performance dragged down the long-term annual average rates of returns for most of the indexes. The Russell 2000 Value Index was impacted the most as its annualized rate of return dropped from 13.64% to 12.40% due to the fact that index lost 9.78% in 2007. However, it’s important to remember that just as bad years will drag down average returns, good years will pull them up. In other words, it’s the long-term average that we’re after and not the short-term ups and downs.

2 responses to What a Difference a Year Makes!

  1. Thanks for this JLP. I wonder if it means that we should be focusing more money to the Russell 2000 Value – potential reversion to the mean scenario. I don’t market time, but it is just a thought.

    TDG

  2. TDG,

    If you reallocate your portfolio every year or so, you do overweight and underweight styles and sectors. That’s one of the great things about asset allocation.