FYI: Investors use calendar years as a period of measurement. How did the market do last year? Most of us view our investment performance “year-to-date” meaning how the investments have changed in value since January 1. Advisors conduct annual (or quarterly) reviews comparing investment returns to benchmarks which are sometimes appropriate but often are not.
Below are two lists of annual returns for a 60/40 portfolio that is hypothetically invested 60% in the S&P 500 Index and 40% in the Bloomberg Barclays U.S. Aggregate Bond Index. The author removed the calendar years on purpose. Take a look at the series of returns and try to imagine experiencing them in succession.
Regards,
Ted
http://blairbellecurve.com/calendar-years-are-arbitrary/
Comments
It's Einstein's special theory of relativity that speaks about time dilation. (I don't need to point this out; the author herself linked to a page on special relativity.)
Special relativity also says that there are no absolute positions or velocities; everything is relative (duh). So time on that rocket ship would not move more slowly so long as the ship were in an inertial frame (not accelerating). To those in the rocket ship, it would appear that it was our clocks on planet Earth that were running more slowly. The spaceship would appear to its passengers to be standing still (think Ptolemy).
"Travel almost at the speed of light". Well, that's certainly precise. Pretty arbitrary, actually. As one gets closer and closer to the speed of light, the clocks back on Earth appear to be running slower and slower. Not just 10x, but 100x, 1000x, ... any multiple you want. Just speed up a bit more, while still traveling "almost" at the speed of light.
It literally blows her mind. I guess we won't be reading much else from her.
What this has to do with investing is beyond me. But then, I'm no rocket scientist
From a practical standpoint, would an equity position opened on Earth by an “Earthling” from his near-the-speed-of-light spacecraft appreciate in Earth years? If so, the traveler would be unimaginably wealthy once he eventually returned to earth - and still young enough to enjoy his new found wealth to the fullest.
It had me thinking that I almost had a handle on that stuff.
In a sense, we’re locked-in to paying attention to the 12-month calendar year. Not only is it the “language” most analysts and market observers communicate in, but there are some practical considerations. Foremost, Uncle Sam takes notice. He constructs your RMD (if over 70.5) so that distributions must be taken on a yearly basis. If you do a Roth conversion there’s normally a 5-year holding period before gains can be withdrawal penalty free. Income taxes are based on yearly income / gains & losses. In preparing a household budget, the 12-month year is easiest to work with. Some household expenses, like insurance premiums or newspaper subscriptions, come due on a yearly basis. College tuitions may be paid on a yearly or semi-yearly schedule. Expensive vacations (think: sun-belt) are best planned / funded according to the yearly calendar. And our automobiles become one model year older roughly every 12 months - affecting depreciation, resale value and insurance considerations.
So in a nutshell, in terms of significance, YTD and 12-month calendar numbers are pretty baked in the cake and it’s entirely natural for Earthlings to take notice. If you inhabited Mars or one of Jupiter’s intriguing moons you would probably subscribe to some alternative way of viewing short term investment performance.
When I look at one year performance, I'm looking at the past 12 months (e.g. 10/17/17 to 10/27/18), or maybe the past 12 full months of performance (9/30/17 to 9/30/18). For one year performance I'm certainly not going to ignore what's happened between January and October of this year (i.e. I don't look at 2017 data as a meaningful representation of how a fund did over the past year).
There are even special cases for RMDs that get away from calendar years: you have a fifteen month period in which to take your first RMD (the year you turn 70.5 and up to April 1 of the next year); so you can also take two RMDs within a single calendar year. In addition, there was a calendar year in which no RMDs were required (2009).
Further, for 401(k)s where the fiscal year doesn't match the calendar year, assuming no withdrawals have been made, the value of the account used to compute the RMD is the account value at the end of the fiscal year, not the value at end of the calendar year (Dec 31). Here's a page discussing this:
https://www.irahelp.com/forum-post/21980-rmd-fiscal-year-based-profit-sharing-plan
For performance comparison purposes, funds must use standardized periods. This is to prevent cherry picking. For example, they can't advertise their performance starting the day the market hit bottom. The use of calendar quarters for comparisons is indeed arbitrary, but the very arbitrariness of these dates means that no fund is benefited or disadvantaged by the choice of dates.
Even here, the yearly periods are not calendar years; they cover twelve months through the end of the last quarter, not the last year. Yes, 12 month periods are baked in. No, figures are often not anchored on Jan 1, except YTD figures. And on Feb 25, does one really care about YTD?
How to Read a Performance Advertisement that Describes a Mutual Fund’s Total Return
https://davisfunds.com/downloads/04readingfndadv.pdf