The post I did just now on luck got me thinking about the role of luck in trading – specifically the luck of your starting date. This ties in with a bit of playing around with annualised returns I have been doing in markets that have been rubbish. One of the issues with looking at returns for various funds and other investment strategies is that they are distorted by the start date and the start date for each individual is a function of luck. This is an issue that bedevils those who are required to undertake investment strategies such as industry based superannuation scheme. To get a sense of the impact of timing on longer term investment returns consider the chart below of annualised returns for the Nikkei.
If I had started my investment journey 5 years ago I would be reasonably happy with the results to date, if I had started 30 years ago I would view it as a disaster. Although I was surprised at the 5 year return of the Nikkei. The same is true when we look at a variety of markets – the period through which you invest shapes your return and your perception of how successful that period had been.The question then becomes how do we overcome this as a factor within our own trading/investment and I think the answer lies on the chart above. Passive investors do rely upon external circumstances to achieve whatever return they get. Whereas. those who are more active look for returns wherever they may – simply being able to map the returns of various markets is a good starting point.