A Quirk of the Calendar Is Messing With Stocks

For example, Morningstar updates its quantitative “star” ratings of mutual funds each month based on their performance and risk characteristics. An analysis performed at my request showed that Morningstar’s 10-year fund ratings oscillated wildly as the bear market returns dropped out of the calculations.

In October 2018, 26.9 percent of the 10-year fund ratings changed, compared with 10 percent in a typical month, said Jeffrey Ptak, Morningstar’s global director of manager research. “The main reason for the surge in changes in the ratings,” he said, ”appears to be the returns of a decade or more ago.”

Mr. Ptak cited two well-known stock funds, Oakmark Select Service and Vanguard Mid-Cap Index Investor. Both received four stars out of a possible five in March 2018, and, he said, “our fundamental opinion hasn’t really budged” about either. Yet the 10-year ratings for each changed nine times by March 2019.

That volatility illustrates the limitations of that quantitative method of assessing investments, Mr. Ptak said. “We recognize that looking at those kinds of numbers is just a starting point,” he said.

Taking longer views — say, 20 years or more — will give you broader perspectives. (This is more useful for evaluating overall markets than for assessing most individual investment managers, who rarely stick to the same approach for 20 years, Mr. Ptak said.)

The annualized return for the S&P 500 for the 20 years through April was only 6 percent. That made it one of the worst 20-year periods since 1928, Mr. Hickey said. He noted that the last 20-year stretch encompassed two bear markets: the dot-com decline of March 2000 to October 2002 and the more recent bear market.

Going all the way back to 1928, the annualized return for the S&P 500 was much better, 11 percent. But few people alive today have held diversified stock portfolios continuously since then, so that rich return may not be much of a comfort.

What, then, can you count on from the stock market over the long run?

Intermittent heartache, bursts of profit and, if the future is like the past, reasonably high returns. But the long run may need to be much longer than 10 or even 20 years.

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