Investing Principle #9: Average Returns Can Be Misleading

You are about to retire, and you think it would be nice to retire in a place with a mild climate. So, you do a little research and find two cities with an annual average temperature of about 65 degrees – San Francisco and St. Louis.

But then you do a little more research and find that San Francisco is pretty much 65 degrees most of the year; they don’t even have air conditioners in their homes. On the other hand, St. Louis has hot summers and cold winters, something you would never know from just looking at the averages.

Similarly, many investors make the same mistake of focusing only on the average return rate, sometimes with disastrous consequences.

Consider the S&P 500. Over the last nine decades, it has had up and down years, but there were just a handful of years when the annual return came close to the average return. And this can be challenging for some investors.

Good planning and understanding what comprises the average return will help minimize uncertainty and maximize your future success potential.