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Putting The Macarena, Charles Barkley & 10-Year Stock Returns In Perspective

Ten years ago, Will Smith was a rapper, Wikipedia did not exist, Charles Barkley—now running for Governor of Alabama—pleaded no-contest after allegedly throwing a bar patron through a plate-glass door, and many of us were still dancing the Macarena. A lot can happen in 10 years. Hey Macarena!

That’s why, in financial circles, 10 years means a lot. Ten-year returns have a ring of authority, bestowing an imprimatur of long-term success or failure on an investment manager or strategy. Ten years would seem to be long enough to smooth market bumps. It would seem to be long enough to include all kinds of weird market events. It would seem to be long enough to use as a predictor of future events.

It’s not. I hate to burst your bubble—after all, so many bubbles have been bursting lately—but a recent report from The Vanguard Group shows the follyCharles Barkley Mug Shot of relying on the predictive value of 10-year returns . The report, “The ‘Lost Decade’: Rational Expectations in Uncertain Markets,” is co-authored by Fran Kinniry, who happens to be the featured speaker at this Friday’s Financial Crisis Webinar.

Kinniry, along with co-author Christopher B. Philips, says in the report that the beauty of 10-year returns can be fleeting. For the decade that ended June 30, 2008, the broad U.S. stock market returned just 3.53% a year—and that, of course, was before the recent market rout. (Stocks in this period under-performed bonds, which had an average annual gain of 5.68%.)

Just a few years ago, stock performance looked much better. Kinniry, who runs Vanguard’s Investment Strategy Group, says that at the end of 2002, coming out of the most punishing bear market in 70 years, the 10-year average annual return for stocks was a perfectly respectable 8.74%. As the end of 2004, the 10-year average annual return on the Standard & Poor’s 500 stock index, was a very healthy 11.92%. And the average annual stock market return for the decade that ended in 1999 was an astonishing 18.11%.

Rearview mirrors, known for making objects appear bigger than they are, distort our view of the future as well as of the past. “The challenge for advisors will be to put the historical results in perspective, presenting them as one somewhat unlikely path that stocks can follow, not as a reasonable basis for expectations of future performance,” says Kinniry.

To learn more, you are welcome to attend this Friday’s session. If you’re thinking of voting for Barkley or want to brush up on your Macarena moves, you definitely want to attend.

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