Numbers Don't Lie But Statistics Do...Be Careful When Looking at Yearly Returns....

Don't be fooled by a trick of the calendar

When you're making investment decisions, it's easy to place too much importance on past performance. Anything that happened on Wall Street yesterday—or last year, or a decade ago—needs to be taken with a grain of salt, because returns from any particular period are an unreliable tool for gauging the future. 

For example, the 2008 global financial crisis may seem like it just happened yesterday (and, granted, we're still living with the repercussions today), but it's more than half a decade in the past. As a result, the five-year average annual return for the broad U.S. stock market, as measured by the Russell 3000 Index, just made a startling bounce: from 2.04% for the period ended December 31, 2012, to 18.71% for the period ended December 31, 2013. 

In other words, at the stroke of midnight this past New Year's Eve, five-year average annual performance for U.S. stocks jumped almost 17%. So, if you're only looking at what happened on Wall Street over the previous five years, the fact that those grim numbers from 2008—when U.S. equities plunged more than 37%—have dropped out of the equation makes things look much better than they would with a slightly longer-term perspective.

DYI Comments:  The best way to measure past performance is from peak to peak or trough to trough returns over market cycles.  This can be exampled by the 1987 crash. As time passed beyond 1987 for each 3, 5, and 10 year reporting period many mutual fund companies had parties celebrating the falling off of those numbers.  This was/is especially true among their sales force.

DYI