Average, But Never Average: An Investing Cautionary Tale

Ladies and gentlemen, children of all ages.  What I am about to present to you is a life-altering investing cautionary tale.  One that will shock and awe you.  One that will present you with concrete evidence of how poorly our brains work when it comes to investing.  Straight from my basement in Chadds Ford, PA I bring to you a cautionary tale of how perception does not meet reality.  Sit down, buckle up, and prepare to have your mind blown!

Pretty dramatic eh?  Probably because I’ve been locked in my basement for over a year and this is as close to exciting as it gets.  Nonetheless, what I am about to present to you will truly change the way you think about investing.

For most of us being average is actually not so bad.  I know we all want to be a top 1%er in everything we do, but sometimes average is actually great.  If I told you that you’d live an average life, approx. 78 years old, most of us would sign up for that.  Heck, if I said, “there are three doors, pick one” and you chose the average life door.  Then I told you, “Sir/ma’am, I’ll let you trade your average life door for either of the two other doors.  One is an extraordinary life door, and the other is a terrible life door,” – how many of you would even consider risking your average life for the other two?  “Not I,” said the cat!

Now, what if I offered you, over the past 63 years, an average U.S. stock market rate of return investing with us?  Would you take it?  A little more context I suppose would be helpful.  What if I told you that since 1957 (when 500 stocks entered the S&P 500) the average return of the index has been approximately 8%, including dividend reinvesting?  Would you take it, especially if that means your money doubles every 9 years?  Shoot, I know I would, show me where to sign! 

Summary Thus Far

 OK – so hypothetically all you have to do is invest with me and we will get you an average rate of return and you’ll live happily ever after.  I’m assuming that if I offered that deal to almost any one of you reading this, you would take it and never complain.  You don’t even have to think about it, worry about it, complain about it, as I have 63 years of data proving it.  Not only that – over these 63 years we’ve seen wars, hyperinflation, terrorist threats, housing bubbles, tech bubbles, global pandemics, and the Philadelphia Eagles also win the Super Bowl, and basically every other unforeseen craziness any of us have lived through.

Now I ask you – regardless of what you think about today’s markets, as I’m sure we are all smarter than cold hard facts. 

Would you argue that:

A. you’ll gladly take this return, and

B. it is a fair assumption to plan for moving forward? 

I’ll assume no smartass responses and go with yes 😊!

Hope You Are Sitting Down

Now is the time for my shock and awe moment, where I get to mess with all of your above-average intellects.  How many years has the S&P 500 over that 63-year period, on an annualized basis, performed 8%?  Bueller?  Bueller? Go ahead, take a guess.  If you said 63, you’d be wrong. If you said 0, you would be dead-on accurate.  The closest it ever came over that time period was a 7.62% rate of return in 1992. 

But Andrew, come on dude that is pretty darn close. Ok, ok, you got me if you round up that would be 8% – I give.  However, the next closest was 1978 at 6.56% – how’s that for ya?  As a matter of fact, those are the only two times over 63 years that the S&P 500 has performed between 6%-10% in any given year, DESPITE THE FACT IT HAS AVERAGED 8% A YEAR! 

Don’t believe me I can see. Check out the below chart since 1998.

Returns By Year

YEAR	TOTAL RETURN
2021	13.26
2020	18.40
2019	31.49
2018	-4.38
2017	21.83
2016	11.96
2015	1.38
2014	13.69
2013	32.39
2012	16.00
2011	2.11
2010	15.06
2009	26.46
2008	-37.00
2007	5.49
2006	15.79
2005	4.91
2004	10.88
2003	28.68
2002	-22.10
2001	-11.89
2000	-9.10
1999	21.04
1998	28.58

Fascinating stuff, right?  I get it, Andrew, you are right, I am wrong – so what? 

I’ll Tell You So What

Remember when a moment earlier I wrote, “You don’t even have to think about it, worry about it, complain about it as I have 63 years of data proving it” (don’t you love a guy who quotes himself, what a narcissist).  Well, herein lies the problem.  You see as investors, we are hoping to get a fair average rate of return.  As investment and planning professionals the challenge is: perception is and isn’t reality.  Hypothetically, I can get you an 8% rate of return, but I can almost never get you an 8% rate of return, you see? 

One of the challenging parts of our job is to help set expectations.  It is also to be that behavioral coach that keeps you grounded and keeps your goals in sight.  The real challenge in this is unlike most other professionals and the life we are accustomed to.  It would be as if I said the average life expectancy is 78, however, you’ll either die at 40 or 126.  Or, what if your surgeon said the average procedure will have you just fine, however, half the people died on the table, and the other half was a wild success? 

Do you see how the mind games play with you when it comes to investing?  So when I say if you did average in investing, but your returns were almost never average would you think about it, worry about it, and yes sometimes even complain about it?  As a 20-year industry professional, I can say with a resounding yes that this is the case.  It is why what we do is so valuable and also so difficult.  We are dealing with people’s money, dreams, livelihood, and emotions.  All of which is counterintuitive to how we are hardwired to think.

What Can We Learn in This Investing Cautionary Tale?

I don’t expect you to instantly change your way of thinking overnight.  I am hoping that you do start to reframe your thinking with this little education.  As a firm that deals with over a billion dollars of your investments, I can tell you the single hardest skill set is this right here.  It is that we are balancing so many emotions at once, with a world that seems extremely uncertain, and on top of that our year over year expectations are rarely met.

It is why you MUST, MUST, MUST take the long view when it comes to investment management.  Additionally, trust and faith in your plan, along with the professionals you choose to partner with are paramount to a successful investment strategy.  

Next time someone calls you average, maybe you’ll have a brand-new perspective on things (that will be reality) and simply say thank you.  Stay wealthy, healthy, and happy!

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