Averages Can Be Misleading

by | Aug 4, 2015 | Investor Behavior, News

I’ve written before about average returns and how they rarely occur. It’s great to look at long term market averages, but on a year-to-year basis, those averages should absolutely not be what investors expect. If you invest with the expectation of achieving average market returns year after year, you’re going to experience quite the emotional ride.

Tyler from Portfolio Charts recently provided an excellent example of how averages can be misleading. He discussed Millenium Force, a roller coaster at Cedar Point in Ohio. This is an extreme ride that reaches speeds of 93 mph with a drop of 300 ft. Tyler reminds us in his post that:

“At a length of 6595 ft and a duration of 200 seconds from start to finish, the average speed of the coaster is a pedestrian 22 mph”

Tyler’s point is that if you look at the averages, you’d probably think Millennium Force is a children’s ride. Another example of the averages not telling the whole story.

Investing is no different! A strategy’s average returns or the market’s average returns are not reflective of the returns that actual investors will experience from year to year. This is a crucial point that investors need to understand.



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