Investors often get caught up in the idea of "average returns." Today, Alex Cabot and Ed Lambert of Birch Run Financial explain why that mindset can be dangerous. Average returns can be looked at over a longer period of time, but very few years are even close to "average."
First, Ed explains the concept of standard deviation - and the expectation that 66% of years can be expected to be within one standard deviation. Here's an example:
A portfolio's average annual rate of return is 6%, with a standard deviation of 10% in either direction.
That means, in a 30 year period, the return will be between -4% and +16% in 20 of those years.
However, that means in the remaining 10 years, you'll see returns less than -4% or more than +16%. Understanding the math and knowing that these wild swings can happen in individual years can prevent making rash buying or selling decisions based on market conditions. This is explained in Alex an Ed's book, Mastering the Money Mind (link here.)
In the second part of our episode, Alex breaks down the historical numbers that reflect this idea. Since 1980, the S&P 500 has achieved an annualized price return (not including dividends) of 9.4% per year.
How many times since 1980 has been within even one percent of that average (8.4%-10.4%)? Just twice.
What about within two percent? Just three times.
Ten percent? The S&P was within 10% of it's average only 18 times since 1980. That means it returned less than -0.6% or more than +20.4% over twenty times in the last 4 decades! So while an average is helpful to look at in the long term, we simply can't chase it on a year to year basis.
Investors often get hung up in what they are invested in, as opposed to why they are investing - which is to grow their money over a long time period. Alex, Ed, and Jag conclude by talking about "zooming out" on the graph to see long term trends. And Alex explains how to do this to get an accurate representation of historical data.
Finally, Alex and Jag mention their Moms - and how supportive they've been. You'll hear how that ties in to our conversation.
Have questions about your financial future? Alex and Ed are always happy to have a conversation, whether you're a client or not.
You can always email them at info@birchrunfinancial.com or give them a call at 484-395-2190.
Or visit them on the web at https://birchrunfinancial.com/
Alex and Ed's Book: Mastering The Money Mind: https://www.amazon.com/Mastering-Money-Mind-Thinking-Personal/dp/1544530536
You can always email Alex and Ed at info@birchrunfinancial.com or give them a call at 484-395-2190.
Or visit them on the web at https://www.birchrunfinancial.com/
Alex and Ed's Book: Mastering The Money Mind: https://www.amazon.com/Mastering-Money-Mind-Thinking-Personal/dp/1544530536
Any opinions are those of Ed Lambert Alex Cabot, financial advisors, RJFS, and Jon Gay, and not necessarily those of RJFS or Raymond James. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. There is no assurance any of the trends mentioned will continue or forecasts will occur. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. The examples throughout this material are for illustrative purposes only. Raymond James does not provide tax or legal services. Please discuss these matters with the appropriate professional. Diversification and asset allocation do not ensure a profit or protect against a loss. Past performance is not indicative of future returns. CDs are insured by the FDIC and offer a fixed rate of return, whereas the return and principal value of investment securities fluctuate with changes in market conditions. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. Stock Market. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. This information is not intended as a solicitation or an offer to buy or sell any security referred to herein. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions. International investing involves special risks, including currency fluctuations, differing financial accounting standards, and possible political and economic volatility. There is an inverse relationship between interest rate movements and bond prices. Generally, when interest rates rise, bond prices fall and when interest rates fall, bond prices generally rise. Investing in small cap stocks generally involves greater risks, and therefore, may not be appropriate for every investor. The prices of small company stocks may be subject to more volatility than those of large company stocks. Securities offered through Raymond James Financial Services, Inc. Member FINRA/SIPC. Investment advisory services offered through Raymond James Financial Services Advisors, Inc. Birch Run Financial is not a registered broker/dealer and is independent of Raymond James Financial Services. Birch Run Financial is located at 595 E Swedesford Rd, Ste 360, Wayne PA 19087 and can be reached at 484-395-2190.
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