The irrelevance of the calendar year

Careful when measuring performance over arbitrary periods

We take certain things for granted, such that we rarely give them any thought. Like, for instance, time.

The illusion of time

Time is a human construct, and as such, it is entirely based on our perception of the universe from our own unique vantage point. (For those of us without a formal scientific background, I highly recommend Carlo Rovelli’s mind-bending masterpiece, The Order of Time as an intro to these ideas.)

As for our measurement systems, the Julian calendar was not created until 45 BC. That’s when January was named the first month of the year, in honour of the Roman god of beginnings, Janus. It was the astronomer Sosigenes of Alexandria who assumed that a 365 day year, with an extra day every four years, would approximate the time it took us to make a trip around the sun. Good guess! It turns out he was 11 minutes off. Pope Gregory XIII made the final official change in 1582 (this is our current Gregorian calendar), moving dates around by a couple of weeks to keep more in sync with seasonal changes and to pin Christmas to the same week as the winter solstice.

All this to say, there’s been a lot of fussing around with dates and calendars, and January 1 itself has no special meaning other than that attributed to it by us silly humans.

And while the first day of the year has no magical properties, we hang all sorts of hopes on the new beginning it symbolizes. I’m not big on resolutions, but the quiet week between Christmas and New Year’s Day offers ample opportunities for reflection. At the very least, it forces us to be conscious enough to write the correct date for a few weeks. I was really proud of myself for a while last year for remembering that the year ended in a “3.” That was, until I realized that I had been dating everything “2013.” Oops.

The magical investment calendar

All of this rambling to say… calendar years are arbitrary and made up.

And yet, because they are so convenient, we insist on using them to measure investment performance. By convention, we divide the years into quarters (because twelve is easily divisible by four), and track financial performance by that metric, if we really want to get granular. Don’t get me started on obsessing over monthly or even daily performance…

The past two years are a stellar example of why this type of thinking can mess you up.

For most fundamental, value-oriented investors, 2022 was a pretty good year, relatively speaking. It was a year when there was a return to sanity, driven by a rise in interest rates, which was propelled by efforts to control post-pandemic inflation.

But for growth investors, 2022 sucked. In 2022, the highly valued growth leaders largely got taken out back and shot. They dragged down the market averages, as seen below (using the “Magnificent Seven” as as growth proxy). Investors who were underweight the “Mag 7” and other assorted momentum growth names typically performed much better than the broader market.

If you’ll recall the mood a year ago, Wall Street strategists were pessimistic, looking for a continuation of this trend into 2023. In fact, the opposite happened.

The “Mag 7” stocks roared back to life, almost magically. As a result, when many investors look at their 2023 performance, a good part of it is just recovering losses from 2022. If stocks had bottomed just a few months earlier, 2023 gains would have looked very different.

When measuring investment performance, especially for a volatile investment, the results can be greatly impacted by slight changes in start and end dates. Remember this!

The markets just turned on a dime in January 2023. Does the turn of the calendar possess magical properties?

Another January inflection?

As we face another January, strategists are once again predicting a continuation of the recent trend. This is not because they have any special insights, but rather because it’s hard to call turning points, and the default is usually to just call for trends to continue.

I’m not sure where we go from here. It does seem that the 2023 rally was based on overoptimistic projections for interest rate cuts, which leaves both stock and bond markets vulnerable to continued economic strength and any signs of inflationary pressure. But this is the same thing I thought a few of months ago. The turning of the calendar has had no impact on my thinking.

It’s a quirk of investment management, due to the quarterly reporting cycle, that the calendar does affect the supply and demand for stocks. Things like tax-loss selling, deferring capital gains, fund manager rebalancing, and “window dressing” of quarter-end statements each have their own unique impact on the stocks in your portfolio. But these impacts are temporary, and unless you’re trying to trade in and out, are best ignored.

Zoom out

If you reduce the variables by ignoring things that don’t matter, investing becomes much easier.

From a private investor’s perspective, the only person who should be concerned with one year investment returns is the person who needs their funds in a year. And that person probably shouldn’t be in the stock market!

If your investment portfolio is earmarked for your kids’ education, your retirement, or for the next generation, it would benefit you to zoom out. Stop getting caught up in short term thinking. And yes — a year is short term!

Zooming out is one of the only advantages the individual investor has over the pros. While they are obsessing over their short-term performance versus their benchmark (after all, their bonus depends on it), you can focus on the long game.

Of all of the lies the investment industry tells, the significance of the calendar year is one of the more benign, but no less important. Ignoring these performance numbers provides yet another edge to the family office or private investor.