The Allure of the 5 Year Average

Men value performance. Women value security.  I overgeneralize, but it serves to illustrate a point:

When grasping for metrics to support Performance Theory, the siren song of the 5 year average can be all-seducing.

Yet it’s fallacious, and here’s why:

Throw in a severe outlier of a year, either good or bad, and the average is skewed beyond meaning, if there ever even was one.


1999. Or, less fun, to a severe degree, 2008.

Everyone understands, or should understand, how an average of anything doesn’t have nearly the accuracy in it’s implicit promise.


5 year averages for US stocks (meaning the 5 years prior) in:

2007 = 3.63%

2008 = -1.95%

2009 = .76%

2010 = 2.74%

2011 = -0.01%

2012 = 2.04%

2013 = 18.71%

Wait, what happened for the 5 year average to be so good in 2013?

2008 got dropped.

I don’t need to remind you what happened in 2008, do I?

Didn’t think so.

And there it is.

Don’t rely solely on 5 year performances for market or, specifically, for any given fund, whether it be passive or active.

There’s value, to a certain point, in looking at what a cut of the market has done in the past, but it contributes only one part in determining the quality, or role, of any given fund or market sector.