To avoid being swayed one way oranother by the Snapshot-in-Time Anomaly, fiduciaries would bebetter served by relying on rolling five-year performance tablesand graphs. (Photo: Shutterstock)

I know what you're thinking: Does the SEC have six controversialrules or only five? Well, in all the excitement of Regulation BestInterest, I kinda lost track myself.

You don't have to be Clint Eastwood's Dirty Harry to take aquiet look at the title and assume this is yet another diatribeabout the glory or failing of the SEC's latest gambit in the GreatFiduciary Wars. Still, what I'm about to reveal does happen to bein the best interest of most investors, particularly those whoregularly contribute to retirement plans.

Those folks have a problem. The performance history reported byplan service providers can never give them a fair idea what kind ofperformance they actually experienced.

Why? Because performance reporting that stays within compliancestandard contains that awful Snapshot-in-Time Anomaly. The goodnews: there's a way to successful overcome this problem (see“Rethinking Performance Standards: Part II – The Solution,”FiduciaryNews.com, November 20, 2018).

For those of you who deplore links, I'll save you the trouble.(On the other hand, I encourage you to read the referenced articlebecause it contains graphs that more efficiently communicate whatyou're about to read.)

A Snapshot-in-Time Anomaly occurs when, for a single portfolio,arbitrary time periods produce dramatically different performanceresults compared to the performance results for time periodsimmediately adjacent to the arbitrary time period chosen.

For example, the 5-year return for the S&P 500 for the yearending December 31, 2013 was a positive 15.55%. Comparatively, the5-year return for the S&P 500 for the year ending December 31,2012 was a negative 4.08%. (These figures do not include reinvesteddividends, but including those won't change the magnitude of thedelta between the two results, and it's only the magnitude that'srelevant.)

Did the S&P 500 change that much between 2012 and 2013? Notreally. Sure, the one-year returns were different, but both werevery high (14.4% in 2012 and 27.1% in 2013). The more criticaldifference is 2008. The single-year loss of 40.67% remained in the2012 five-year number but rolled out of the five-year number as of2013.

To avoid being swayed one way or another by the Snapshot-in-TimeAnomaly, fiduciaries would be better served by relying on rollingfive-year performance tables and graphs.

Why five years? Well, to borrow from Goldilocks, it's neithertoo hot nor too cold. It's not so short as to not be considered“long-term.” It's not too long so as to make it difficult to assesshow quickly the portfolio manager responds to changing events.

Rolling periods really help people who make regularcontributions to their retirement plan.

Unlike the standard reporting format, rolling period performancereporting gives retirement investors a sense of how their yearlycontributions have done based on the year the contribution wasmade.

That's something a fiduciary can count on.

Now, if only the SEC can strive for the rolling five.