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On Capturing a Full Range of Market Environments
By Dr. David Edward Marcinko MBA, CMP™
[Publisher-in-Chief]
What is the appropriate time period for portfolio growth comparison?
Performance measurements over trailing calendar periods, such as the last one, three, five or 10 years, are often used in the mutual fund and investment industry. While three-to-five-to-ten years may seem like a long enough time for an investment strategy to show its value added, these time periods will often be dominated by either a bull or bear market environment, and/or a large cap or small cap dominated environment, etc.
Market Cycles
One way to lessen the possibility of the market environment biasing a performance comparison is to focus on a time period that captures full range of market environments; a market cycle.
The market cycle is defined as a market peak, with high investor confidence and speculation, through a market trough, in which investor bullishness and speculation subsides, to the next market peak.
A bull market is a market environment of generally rising prices and investor optimism. While there have been several definitions of a bear market based upon market returns (e.g., a decline of –15 percent or more, two consecutive negative quarters, etc.), the idea implied by its name is a period of high pessimism and sustained losses.
Thus, one returns-based rule-of-thumb that can be used to identify a bear market is a negative return in the market that takes at least four quarters to overcome.
Assessment
The stock market has been booming lately. Up almost 100% since March 2009, after being down almost 50%. And so, perhaps this is a good time to re-evaluate the performance of your investment portfolio[s].
And so, by examining performance over a full market cycle, there is a greater likelihood that short-term market dislocations like the “flash crash” of 2009 will not bias the performance comparison.
Conclusion
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Filed under: Interviews, Portfolio Management | Tagged: david marcinko, Investing, Portfolio Management | 1 Comment »
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