Monthly Rolling Periods

Despite the historic advance of equities and the proven resilience of capitalism, many investors still get nervous during extended or sharp down periods such as the one we endured in 2008. When market-moving news appears, many investors may question if the fundamental relationship between risk and return is still valid. However, when a larger data set is considered, the situation looks better for long-term investors.

Rolling period analysis enables investors to examine large sets of performance data by dividing returns into monthly rolling periods, instead of traditional calendar year periods with a January beginning and a December ending. This method provides Simulated Passive Investor Experiences (SPIEs) which begin at the 1st of each month throughout the designated period. Figure 9-5 shows 12 consecutive 12-year rolling periods beginning on January 1, 1959. Each rolling period can be thought of as an outcome representing the experience of a unique investor who started and ended on the dates specified in the period. Hence, the name Simulated Passive Investor Experiences.

Figure 9-5

The primary advantage of rolling periods is the large number of simulated investors who can be observed in a given time period. For example, in a 50-year period, there are 589 rolling 12-month periods as opposed to 50 consecutive, non-overlapping 12-month periods. One important caveat regarding the use of rolling periods is that a single monthly return may be counted in any number of rolling periods, depending on where it occurs in the overall period.

Figure 9-6 charts the comparison of the performance of various equity indexes from 1928 through 2013 using this SPIE analysis. For example, the chart illustrates in the bottom left quadrant that over 1,021 1-year (12 months) monthly rolling periods, a simulated passive investor in a large growth index beat a simulated passive investor in a large value index 44% of the time, causing investors to think it might be a toss-up between large growth and large value. Compounded by the financial media touting the benefits of large growth companies, investors tend to believe that large growth can perhaps be a better investment. But in 793 20-year monthly rolling periods, the large value index beat the large growth index 88% of the time. Over short periods, volatility and price swings confuse investors as to which indexes are better long-term investments, but the picture becomes clearer when longer periods are considered.

Figure 9-6

Figure 9-7 tracks large, small, value, blend, and growth indexes from around the world. For U.S. markets, more than 86 years of data are shown. For non-U.S. developed markets, 39 years of data is available, and there are 25 years of data for emerging markets. In each case, it is worthwhile to note the lackluster annualized returns of both large and growth indexes, relative to the strong annualized returns delivered by all of the indexes labeled small or value.

Figure 9-7

Step 9Monthly Rolling PeriodsCapitalismSimulated Passive Investor ExperiencesSPIEsRolling Periods