Chart of the Week: Beware of Sample Periods
Investors should evaluate fully representative data rather than falling for the “shiny object” of recent performance.
Anyone who’s ever bought a used car knows the importance of avoiding a cherry-picked depiction of history. Low mileage and regular oil changes don’t matter much if the seller fails to mention the car was once submerged in floodwater.
Many investors have been drawn to the shiny object stocks of the S&P 500 Index on account of their recent performance – since 2010, the large cap S&P outperformed US small cap value stocks1 by an annualized 1.7 percentage points. However, this impressive period for the S&P was immediately preceded by the “lost decade” (January 2000–December 2009) when the index returned negative 0.9% – more than 13 percentage points behind US small cap value stocks.
Using the full data history provides perspective. Since June 1927, US small cap value stocks outperformed the S&P, 13.1% to 10.1%. The full sample also depicts the subperiods as aberrations for the S&P 500. Beating small cap value stocks over 14 years and returning less than zero over 10 years both seem unlikely expectations for the long term. Small cap value stocks, by comparison, have been more consistent in these subperiods.