Many investors believe markets to be cyclical and search for signs of cycles in an attempt to predict which investment styles are coming into and out of favour.

People have a tendency to see patterns where they do not exist. Do a Google image search for "#iseefaces" and you will understand what I mean. This can be a problem for investors because it is one thing to interpret a startled expression in a bowling ball or a light switch, and another to think that historical stock market data can help predict the future.

Many investors believe markets to be cyclical and search for signs of cycles in an attempt to predict which investment styles are coming into and out of favour. Rolling stock returns are like a Venus flytrap for these investors, luring them to the illusion of a pattern where one may not exist. Multi-year returns expressed over overlapping, rolling periods appear cyclical because consecutive observations share many data points. For example, a five-year rolling return computed at the end of June has 59 out of 60 data points in common with the end-of-July five-year return.

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