Whether you’re reviewing investments as a trustee or tasked with picking your own options as a defined contribution participant, the start of your evaluation process is likely the same: “What do the trailing returns look like?”  In other words, are the 1, 3, 5 & 10-year trailing performance numbers better, worse or largely similar relative to other options being considered?  This tendency to rely on trailing performance does not apply exclusively to comparisons between competing investment options, we also commonly use trailing return periods to evaluate if a portfolio’s objectives are being met over time and/or if an asset class (represented by an index) is worthy of new or ongoing inclusion in a portfolio.  Unfortunately, trailing performance simply doesn’t tell the whole story.

Every trailing return reviewed for an investment, portfolio or index has an “untold story” each time it is updated for a new time period (e.g., September 30th vs. December 31st trailing performance).  This is because there is a basic “rolling-return” factor associated with updating trailing performance each period (e.g., quarter), and while we all know the factor exists, it rarely gets a second thought when evaluating returns.  What factor are we referring to?  Each quarter when an investment’s trailing returns are updated, not only is the newest quarter’s performance added to the trailing calculation(s), the oldest quarter associated with each individual trailing return period is being dropped.  As a result, when a positive quarterly return is added to a trailing return calculation, it creates an upward bias on the new period’s trailing return(s).  Conversely, when a positive return for the oldest quarterly period is dropped off the same calculation, the effect is the opposite and vice versa.  This “out with old, in with the new” methodology is commonly referred to as “endpoint sensitivity.”  In simpler terms, when the evaluation period starts and when it ends has a dramatic impact on the results being reviewed.

It’s easy to visualize how endpoint sensitivity can have a large impact on results for shorter trailing return calculations.  For example, for a 1-year trailing period (rolled quarterly), 25% of the return data in the 1-year calculation changes quarter-over-quarter as the oldest quarter is dropped and the most recent quarter is added.  While that logic is straightforward, the actual mathematical impact on the 1-year trailing return calculation is a function of the delta between the two quarterly returns that change.  As a result, greater the difference in the quarter “added to,” relative to the quarter “dropped from,” the calculation, the larger the impact on the new 1-year trailing return calculation.

Despite this short-term recognition, we typically don’t consider the impact of endpoint sensitivity when reviewing longer-term results.  This is understandable since dropping and adding a single quarter from a long-term trailing return calculation (e.g., 10-years) does not typically result in large changes in performance.  For example, when a 10-year trailing return rolls to the next quarter, each new quarter-over-quarter calculation retains 39 quarters (9.75 years) of legacy return data (97.5%) and for each year-over-year roll, 36 quarters of legacy return data (90%) remain part of the new 10-year calculation.  However, when an extreme period of performance like 2008 is the data dropped from the calculation, even the 10-year trailing performance numbers can show surprisingly large shifts.

The table below illustrates the upward trending impact on the S&P 500 index’s 10-year trailing return over the course of 2018 as each new quarter was added and each quarter of 2008’s index performance sequentially dropped out of the trailing 10-year performance calculations.

Source: AndCo Consulting, based on data derived from Investment Metrics PARis. For illustrative purposes only.


As you can see, despite two negative return quarters for the S&P 500 index during 2018, the index’s 10-year trailing return actually increased as each of 2008’s negative quarters dropped out of the calculation.  Most interestingly, even with 2018’s disappointing 4th quarter index return of -13.52%, the 10-year trailing performance of the S&P 500 from the 3rd to the 4th quarter still increased since that calculation was also dropping a -21.94% return from the 4th quarter of 2008 (+8.42% delta to the 10-year trailing return calculation).  To understand just how extreme this swing is relative to history, the 2017-2018 year-over-year return change of +4.62% for the index was the 3rd largest positive shift over the 83 rolling 10-year trailing calendar year periods back to 1926 and well above the +0.03% average year-over-year variation.

Unfortunately, while the impact of 2008’s negative quarters rolling off the 10-year return calculation had a large positive influence on 2018’s 10-year trailing index results, the story doesn’t end there.  The table below hypothesizes the potential downward impact on the S&P 500 index’s future 10-year trailing performance for the remainder of 2019.

Source: AndCo Consulting, based on data derived from Investment Metrics PARis. For illustrative purposes only. The above demonstrates a hypothetical scenario and contains projections which are speculative whereby the actual results could differ from those indicated.


As you can see, after the 1st quarter of 2009’s negative return drops out the calculation, endpoint sensitivity may begin to cut the other way.  Holding the S&P 500 index return at an admittedly unrealistic 0.00% for each quarter of 2019 (the index is +11.5% for the year through February), the chart illustrates how the index’s 10-year trailing return could likely peak at the March 31st measurement period as the tail-end of the financial crisis drops out of the 10-year trailing return calculation.  Although a 0.00% return is highly unlikely, the mathematical reality is unless the S&P 500 index can replicate the 15%+ performance realized during the 2nd and 3rd quarters of 2009 during upcoming the 2nd and 3rd quarters of 2019, the index’s 10-year trailing return will begin to roll lower.

What’s the take away? First, this is a fascinating piece of mathematical market trivia.  Second, if your portfolio is built around a meaningful allocation to domestic equity, your portfolio’s 10-year trailing total return has the potential to peak with your March 31st results (at least for some time).  Finally, while they are certainly a valuable starting point, there is much more to consider when evaluating an investment, portfolio or asset class (index) than simply comparing its trailing performance results, even if those trailing returns are for long periods of time.


Important Disclosure Information

The views and opinions expressed are solely those of AndCo Consulting. These statements are not guarantees, predictions or projections of future performance or of any outcome. This should not be regarded as investment advice or as a recommendation regarding any particular course of action.

This document has been prepared for informational purposes only, and is not intended to provide, and should not be relied upon, for legal or tax advice. The material provided herein is valid as of the date of posting and not as of any future date, and will not be updated or otherwise revised to reflect information that subsequently becomes available, or circumstances existing or changes occurring after such date.

This contains forward-looking statements, estimates and projections which are inherently speculative and subject to various uncertainties whereby the actual outcomes or results could differ materially from those indicated.

All data and figures for the S&P 500 Index are sourced from Investment Metrics PARis.  Certain information is based on sources and data believed to be reliable, but AndCo cannot guarantee the accuracy, adequacy or completeness of the information.

AndCo Consulting is an investment adviser registered with the U.S. Securities and Exchange Commission (“SEC”). Registration as an investment adviser does not constitute an endorsement of the firm by securities regulators nor does it indicate that the adviser has attained a particular level of skill or ability.