10-year returns are about to look a lot better

The worst losses of the financial crisis are dropping off funds' long-term returns, but they shouldn't disappear from our memories.

Michael Keaveney 5 December, 2017 | 6:00PM
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Michael Keaveney: The global financial crisis began in 2007, and really hit the mainstream in terms of equity prices in 2008 and early 2009. That means we'll be coming through the 10-year anniversary of some of the worst points of the equity markets over the course of next year, and for those of us who came through that period, whether as professional investors or managing our own portfolios, who could forget those times?

Well, the passage of time has gone a long way to soothe the past fears of investors, and equity markets have marched forward to new highs around the world. Company valuations, particularly in countries like the United States, are getting high by objective long-term standards, and there appears to be a complacency among investors as measured by the low volatility we are seeing on a day-to-day basis.

One widely followed measure of the markets expectations for future volatility is the VIX index. It is often referred to as an "investor fear gauge" and it is at historically low levels.

As we move through the anniversary of some of the worst months: November 2007, July 2008, September and October 2008, and February 2009, the extreme negative returns and associated volatility will soon enough no longer be included in 10-year historical measures of past return and volatility.

That's not going to help our complacency!

Additionally, one of the key risk classifications for mutual funds in Canada is driven largely by a historical look at 10-year standard deviation of fund or benchmark performance. It will be interesting to see if the risk classifications for equity products are amended as the global financial crisis passes out of the 10-year window of measurement.

It's amazing how little volatility there appears to be in equities markets today, and over the next year a lot of the upheaval we experienced in the global financial crisis will be squeezed out of the 10-year display of investment returns and standard deviation measures. Don't allow that to cloud your judgement. While we don't expect another global financial crisis, it would be foolish to forget the hard investment lessons from 10 years ago.

For Morningstar Investment Management, I'm Michael Keaveney.

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Michael Keaveney

Michael Keaveney  Michael Keaveney, CFA, is Director, Investment Management at Morningstar Associates, Inc.

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