If you're the fund manager, owner, or an individual investor, then compound return absolutely matters. You want the most amount of money at the end of the time period, and you've already committed your capital.

But if you're a retail investor trying to decide where you want to put your capital - which, presumably, is who this article is aimed at - what you're looking for is whether the fund in question will outperform your alternatives. What this article is saying is "past performance is no guarantee of future results", i.e. you do just as well putting your money in an index fund or investing via a dartboard as you would picking the top-ranked fund in last year's returns.

You don't get to travel back in time 5 years to make your investment decisions, so compound returns in the past are immaterial to you. You want the highest compound returns in the future, which on average come from passively investing in the indexes.

1. This is an article of faith.

2. "On average" doesn't matter. How much effort is required to stay away from the low end of that average is what matters.

The problem is we don't know which funds are going to beat the market over the next 5 years.

If we use fairly common fees, the table looks more like this:

  Option 1: 0.25% fee, Option 2: 1.5% fee
  Year 1       7.75%    13.5%
  Year 2       7.75%     5.5%
  Year 3       7.75%     2.5%
  Year 4       7.75%    17.5%
  Year 5       7.75%     4.5%

  Total gain:   45.2%      50.7%
  Compound/yr    7.75%      8.5%

Edit: formatting

Let me illustrate by running with your own suggestion of trying to find out whether there are actively managed funds that consistently produce better compound returns than indices over 5 year periods. How would you actually do that?

Certainly we agree that a fund outperforming an index over one 5 year period is irrelevant to answer that question. To check whether there is a fund that consistently outperforms an index over 5 year periods, you would look at several such periods, e.g. 5 consecutive 5 year periods (for a total of 25 years of data [1]).

This is exactly analogous to the statistic used by the article, and somebody could then make the argument (like yourself) that a misleading statistic is used, and that people should instead look at the compound return over the entire period of 25 years.

There is nothing wrong in principle with the statistic used by the article.

However, it is reasonable to argue that looking at compound return over a 1 year period is too short (because typical investment time horizons are longer), and I would agree. Unfortunately, there's [1].

[1] And obviously, using such a long timespan is itself problematic for many reasons.

Or perhaps OP intended to refer to this problem, and it just wasn't done very clearly.

Still works out great.

http://awealthofcommonsense.com/worlds-worst-market-timer/

Yes we're talking about the S&P500 but I'd like to point out that this isn't a general rule of markets; past performance does not guarantee future results. The S&P500 was at around 60 in 1960 and near 2000 today. It doesn't matter when you bought or at what intervals, money invested has performed well.

That's my patented investment strategy!

Chart any stock, and find it's high point. That's where I bought it.

Sure, the variance on the yearly rate of return will shrink as the time horizon grows. But because the yearly rate is compounded, this doesn't prevent the total variance in returns from growing with time.

Long term investment doesn't cure the risk from volatile investments.