Investors, Don’t Let This Stock Market Magic Trick Fool You

Investors, Don’t Let This Stock Market Magic Trick Fool You

As the one-year mark for fund statements moved past the March 2020 low, returns look like they have surged—but this calendar quirk can mislead the unwitting investor. This according to a recent article in The Wall Street Journal by columnist Jason Zweig.

“What happened? Did hundred of fund managers start popping genius pills?” Zweig quips. “No, although marketing departments are probably gearing up to tout their brilliance. Instead, the ghastly losses of early 2020, when stocks fell by 34%, have just disappeared from trailing one-year returns.”

Zweig explains, “It’s one of the best—or worst! —examples I’ve ever seen of what finance researchers call time-period dependency. How much your investments earn always depends on when you start counting and when you stop.”

Noting how “performance takes an automatic upward leap when crashes drop out of the record,” Zweig reports that Wall Street refers to these situations as “easy comps” and, in the current case, they will “linger in some year-over-year economic results until the second half of 2021.” Zweig concludes with a warning: “For the next few months, investors should be even more skeptical than usual about claims of superior performance. No one deserves credit just for a quirk in the calendar.”