Lies, Darn Lies, and Statistics!

You have all probably heard this title’s saying before; statistics can be misleading if not thought through carefully.

While updating some client materials, I noticed an interesting anomaly relating to S&P 500 returns. The phenomenon of “time period bias” has reared its ugly head!

For the 10 years ended December 2018, the S&P looks like a great winner with 13.01% average annual returns (even including the large drawdown in Q4); much higher than its longer term historical trend of about 10%. This compares to the 10-year period ended in 2017 that showed only 8.45% average annual returns. This large discrepancy in returns is due to the difference in the starting points surrounding the Credit Crisis in 2008-09. The 10-year returns for 2018 starts with a much lower base (December 2008) compared to the starting point for the 10 years ended 2017 (December 2007).

This might qualify more as trivia instead of significant investment info; but, it is important to be aware that the 10-years ended 2018 is an anomaly that significantly deviates from longer term historical returns. For anyone running investment projections, it is best to either use more realistic projections or a longer time horizon.