Letters to the Editor
To the Editors:
The article “Your Portfolio: Maintaining Perspective” [November 2008 AAII Journal] provides several examples of historical investment returns to demonstrate the resiliency of the market. In Table 3 [Best and Worst Average Annual Returns (1945–2007)] the authors display several one-, five-, and 10-year average returns to drive home their point that an investor needs to remain in the market for the long term to achieve solid investment returns and to avoid short-term losses.
I cannot help but notice, however, that all of the “best average annual returns” are almost 10 years old. Out of 15 examples, the year 1999 is the most current year included in any of the returns—some go back as far as 1949. While likely intended to provide comfort and support to readers during this volatile period, for me, the article did just the opposite. The market of today bears little resemblance to the market five years ago, less so to the market 10 years ago, and certainly looks nothing like the market of the 1940s!
Today’s market is global in scope and includes many complex investment vehicles that very few people completely understand. Also little understood is the impact that the collapse of one investment vehicle may have on others and the impact on key businesses—look at what happened to Lehman Brothers and AIG.
My point is that only recent annual returns provide an indication of what today’s market will and will not do. The average annual return of the 10-year period of 1949–1958 is ‘nice to know,’ but completely irrelevant to today. Since 2000, the market has demonstrated dramatic volatility, high sensitivity and unexpected relationships. And I suspect we will see more of this in the future.
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