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.