Why the calendar is making some advisers look smarter than they really are

If you want to prove your genius to clients, today would be a good day, provided you use the most recent 12-month figures available to you.

While it may seem like a distant, dark memory, the first part of 2016 was awful. The Standard & Poor’s 500 stock index fell 11.2% from Dec. 31, 2015 to Feb. 11, 2016. Despite its awful performance, the blue-chip index managed to eke out an 11.96% gain for 2016, assuming you include reinvested dividends.

The 2016 gain was certainly above average: Large-company stocks have averaged a 10.05% annual gain since 1926, according to Ibbotson Associates.
But 12-month returns are dropping the January and early February doldrums, and adding a 2.6% gain for 2017.

The result: Supercharged 12-month returns. As of Tuesday, for example, the largest stock ETF, Vanguard Total Stock Market (VTI), has gained 26.52% for the previous 12 months. Its 2016 record: 12.7%. The S&P 500 jumped 24.6% the 12 months ended Tuesday.

For some funds and ETFs, the month-and-change difference in measurement time means the difference between rotten performance and excellent performance. Renaissance IPO ETF (IPO), for example, clocked a 0.2% loss in 2016. Its current 12-month gain: 29.4%.

“The whole business of point-in-time measurements is so limiting and false,” said Dan Wiener, editor of The Independent Adviser for Vanguard Investors.
“It’s a horrible way to measure performance.”

A better way is rolling five-year performance, Mr. Wiener said. Or better yet, use the relative performance of one investment against another measure of performance. Possibly the best example is the miserable performance of Vanguard Wellington (VWELX) in early 2000 vs. Vanguard’s Balanced Index (VBINX). The fund had routinely outperformed the balanced index until then.

“All of a sudden, things go haywire in 2000,” Mr. Wiener said. Tech stocks had gotten terribly overvalued, and Wellington, a value fund, hadn’t participated in the tech bubble. When the bubble burst, Wellington once again started to outperform.

So if you’re thinking of bragging to your clients about your savvy fund-picking, you should probably note that the fund’s peers have seen startling improvement in performance, too. And you might also note that your clients’ funds are probably turning in gains that are well above their long-term mean – and that an adjustment might be due.