Truth, lies and stats

James A. B. Downie, who manages the assetbase website says that we all pretend that we look long-term and definitely look at the short term results just for interest's sake.

However, the truth is somewhat different. Retirement funds issue benefit statements at least annually, many more frequently than that, so you can be assured that the member's focus stretches back as far as the previous statement.

So why are trustees looking so chirpy?

After all, this time last year, they were all considering resigning because it seemed impossible to report a decent return to the members. Well this is where the lies, damn lies and statistics play right into the hands of the trustees.

The average returns produced by retirement funds with global mandates for 12/2002, 1/2003, 2/2003 and 3/2003 were -2.33%, -1.64%, -3.15% and -4.54% respectively. That works out to a loss for the four months of 11.2%. (Remember the pain?)

December 2003 had an average return of 5.08% and January 2004 was 3.30%. The difference between measuring from 1 December 2002 to 30 November 2003 and measuring from 1 February 2003 to 31 January 2004 is a swing of 12.6% between the two 12 month periods!

One casts off the two bad months and adds on 2 good months and suddenly the trustees want to start communicating with themembers again.

Well, wait. With the benefit of the delay in getting these numbers to you, we can know that February 2004 was just slightly positive on average but it will replace -3.15% in the rolling 12 month numbers, so hold the presses. Report to the end of February.

But beware.

The investment markets are fickle as all of us know. May 2003 was a great month where the average return was over 10% for the month so if May 2004 doesn't produce at least as good a return the 12 month returns will swing the other way.

Just imagine if May 2004 is a negative month for whatever reason, say, -2%. That will wipeover 12% off the rolling 12 month numbers and you'll be back where you started!

So whatdo investors and trustees do?

Well trustees have fidelity insurance,or at least are legally required to have it, so they're okay. Markets swing all over the place and once the various elections all over the world are over, the resurrection of rationality could be quite painful.

It's curious, by the way, how many general elections there are this year throughout the globe. I can't remember the numberbut it is remarkable.

Focus on your objective if it's honestly reasonable and well thought out, change it if it isn't, and then invest accordingly.