Why Advisors Have Had to Change the “Look-Back” Period!

I was driving across Southern Idaho the other day and was searching for something to listen to on the radio when I came across a financial planner talking about the current economy.
As a “recovering and reformed” financial planner I was interested in what he had to say.

I remember back in the mid eighties when we did some research on mutual funds we would go back 3-5 years and we could show some pretty descent double digit averages.  Then we could put together an analysis showing the client a very nice return over the past 3-5 years.

As the economy progressed into the nineties it was easy to show 3, 5 and even 10 years of descent growth. There were a few glitches along the way, Black Monday in 1987, the 1994 recession, and a stalled economy here and there, but for the most part showing clients 5 years of reasonable return was easy to do.

Then came the turn of the century. As you know the Y-2k scare had many investors tucking away their capital in fear of losing all their money, not from a drop off in the economy as much as from a computer error. Then the dreaded day of September 11th attack in 2001.

Not long after 2001 many advisors found that they needed to go back 10 years to show any kind of return enticing enough for an investor to risk his/her capital. In the eighties and nineties it wasn’t hard to show 9-12% over 3 to 5 years, but after 9/11 you had to look back for 10 years to find that same reasonable risk reward ratios.

Fast forward through the downturn in the markets and the economy since 2007 and here we are now. Listening to this financial advisor on the radio shocked me. He was trying to peddle the same old information about diversification and asset allocation and how over time your money does just fine in the stock market. However, something had dramatically changed. Where we use to have to look back 10 years to show a descent average rate of return to prove this out, this financial advisor was telling investors that they need to look back 35 YEARS now! Come on, 35 years? Who can wait 35 years for their portfolio to perform? It’s crazy.

The average American doesn’t start saving for retirement until they are in their mid to late forties. Which means from age 45 to age 80 this “average” investor is suppose to let this portfolio go without worrying. Is that possible? Could you do that? I know I couldn’t.

Whereas the eighties and nineties provided ample opportunity to achieve a reasonable rate of return in a 3, 5 or even 10 year time frame, it appears that a 35 year time frame is what an investor needs to look at in order to be satisfied with the return. That is unacceptable to me, but it’s the world we live in, and it’s why I have elected to steer away from risk and stick with those strategies that work over time and put you in control.