Investors Focus on Short-Term Data

The first problem investors face is that the long-term history of stock market returns is rarely provided to them. Secondly, investors are not aware that long-term data has more value to them than short-term data. When presented with 90 years of data, many investors deem the data irrelevant, because they do not have 90 years to live. This perspective overlooks the value of a large sample size. Investors who make decisions based on short-term data often regret it.

When describing the risk and return of an index, significant errors are likely to occur when using a subset of the available data. For example, in the five year period from 2013 to 2017, the S&P 500 Index had an annualized return of 15.79%88.  Based on that return; many investors would conclude that the S&P 500 was a “shoot out the lights” investment. However, for the 20-year period ending 2017, the annualized return was much lower at 7.20%. For the 50-year period ending 2017, it returned 10.12%, and for the 90-year period ending 2017, it produced a 9.87% return. An S&P 500 index fund is an important building block for inclusion in a diversified index portfolio. The index is made up of 500 of the most economically important large U.S. companies, and comprises nearly 80% of the total market capitalization of the U.S. equity market. When gathering information to identify the risk and return characteristics of the many asset class indexes that belong in a diversified portfolio, the more quality long-term data you have, the more accurate and probable are your expectations about future outcomes.

Step 9Short-Term DataSample SizeS&P 500