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

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

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

Why? Because performance reporting that stays within compliance standard contains that awful Snapshot-in-Time Anomaly. The good news: 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 article because it contains graphs that more efficiently communicate what you're about to read.)

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

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

Did the S&P 500 change that much between 2012 and 2013? Not really. Sure, the one-year returns were different, but both were very high (14.4% in 2012 and 27.1% in 2013). The more critical difference is 2008. The single-year loss of 40.67% remained in the 2012 five-year number but rolled out of the five-year number as of 2013.

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

Why five years? Well, to borrow from Goldilocks, it's neither too 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 assess how quickly the portfolio manager responds to changing events.

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

Unlike the standard reporting format, rolling period performance reporting gives retirement investors a sense of how their yearly contributions have done based on the year the contribution was made.

That's something a fiduciary can count on.

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

Instant Insights /

Why doesn't the SEC 'strive for five'? – Carosa

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