Flipping Off The “Average Return”

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Unmet expectations cause us distress. At times we lose perspective. When things are going well, we bask in the warm sunshine of +20% returns. But when it temporarily and inevitably floods worst-case -30% returns, we forget there are seasons. Return seasons. Sorry, it’s not stress-free weather all the time with 10% returns like clockwork. Not every year is going to be 70 degrees with a light ocean breeze.

It’s not just a straight line going up

Over ten years ago, a veteran advisor I worked for swore by the Ibbotson chart depicted below. He was a religious devotee to the five lines. In sacrifice to average returns, he’d request we bow down and behold the long-term returns of stocks. His sermon would continue almost with more conviction than a Louisiana Baptist minister sweating on the pulpit:

“Eric! Make ’em tape up that chart on their fridge. Tell them to. Look. At. The. Chart.”

“Don’t worry about [Insert perceived reason for portfolio declines, e.g., the Fed]. Stocks are up about 10% on average,” he’d say.

“Look at this chart!”

Clients would take minor solace. Their portfolios down with significant paper losses in red font. Then, they’d look up. Their eyes squinting as they reviewed each line on the chart. Finally, they’d muster up an “I guess” shrug. Between us, I never thought they “got it.”

Something to remember next time

Sorry to say it this way, but you won’t forget it: Market returns flip us off over the long term, and it’s up to us whether we stay on the road, or get off. Most of the time we’re in the middle, but sometimes we’re on one end or the other. Just take a look at the Standard and Poor’s 500 Index calendar returns below. It looks like a… Well we know what it looks like.

So, next time on the way to your destination after a profane hand gesture is exchanged, remember, keep driving. Stay on the long-term road; it’s not stress-free; investing is not a straight line up day-to-day. Like the most important things in your life, it takes time, and stings a little more than we’d like. Just like getting the infamous bird gestured to us.

I have a feeling you might remember this sooner than you’d like.