When I talk to my clients about investing I always make sure to take some time to talk about the average return they can expect. Sadly I don’t have a crystal ball and can’t look into the future, but I can use the long-term averages from the past to give an indication of what will happen in the future. We all want certainty, but given there are no certainties when you invest, we’ll give you averages.
Here’s the important thing to know about averages, they also have things called standard deviations. Standard deviations measure the amount of variance or volatility in an average.
For example, the average of 7 and 9 is 8. The average of -1 and 17 is also 8. The average between those numbers is the same, however the variance is considerably different.
A balanced portfolio has an average return of 7.2% with a standard deviation around 9%. This means that 68% of annual returns have been between one standard deviation (-1.8% and 16.2%) of the average. Further, 95% of annual returns have been between two standard deviations of the average (-9.8% and 25.2%).
The media like to play up movements in the stock market. Whether it’s daily, weekly or monthly, they love a bad news story and will tell you all about the ‘bloodbath’ on the stock market today. Remember that investing in the stock market is a long-term move and that a -9.8% return during a year is still within the realm of normal (though unenjoyable), and so is a 25.2% annual return. What happens today or tomorrow is considerably less important than what happens over the next decade.
Invest well, invest wisely, invest as much as you can.