Averages

One of the statistics that we spend a lot of time talking about is averages, which is the middle of a set of data. When we talk about market returns or market multiples, averages are often used as the benchmark to help set expectations and how to base forecasts.

For example, on a total return basis, the S&P 500 has returned 10 percent on average per year going back to 1926*.  But if we look at the years on an individual basis, then returns really ranged from -52.7 percent in 1931 to +66.7 percent in 1933, quite a wide range of outcomes.

The chart below is from Dimensional Fund Advisors and shows the average return of close to 10 percent per year plus or minus two percent as the grey line, and then each of the individual yearly returns in the scatter plot.

 

Source: Dimensional Fund Advisors

The key takeaway from the chart is that over roughly 90 different observations, only six have been within the 8-12 percent range with the majority coming in well above or below. The fluctuations can cause consternation with even the most sophisticated investors; however, being aware of the potential range of returns and remaining disciplined can help mitigate making an emotional decision versus staying the course.

The S&P 500 is not available for direct investment; therefore, its performance does not reflect the expenses associated with the management of an actual portfolio.