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What a Difference a Year Makes!
By JLP | 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.
This graphic shows those same indexes from 1987 - 2007:
Now, this graphic shows you how 2007’s returns impacted the annualized rate of return (also called the geometric average) for the indexes:
.GIF)
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.
Topics: Investing |
January 28th, 2008 at 7:46 pm
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
January 28th, 2008 at 9:10 pm
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.