Average Rarely Happens, But Great Can Happen Often

By Michal Emory on April 18, 2018

Over the last 90 years the S&P 500 has averaged 9.37% annually including dividends. That sounds great but it is amazing how rarely the S&P 500 has been close to average. How rare? I am glad you asked.

If you look at the 12-month rolling periods since January 1928 (February 1928-January 1929, March 2017-February 2018, etc.) we have 1,072 such periods. Out of those 1,072 periods, how many times do you think the S&P 500 has had a previous 12-month return of 7.37% and 11.37% or 2% either side of the historical average? Would you be surprised to learn that it has only happened 8.6% of the time? Here are some other surprising numbers around how rarely “average” happens.

•    24.2% vs. 22.1% - Investors are more likely to have a 12-month period of returns over 25% (24.2% of the time) than to have returns within a 10% range (4.37%-14.37%) of average (22.1% of the time).

•    13.9% - The percent of the time investors would have just endured a 12-month period where returns were DOWN more than 10%.

•    44.7% - The percent of the time Investors would have just enjoyed a 12-month period where returns were UP over 15%. That means investors are more than twice as likely to have a 12-month period up over 15% than we are to be within a 10% range of average.

Why do I bring this up? I bring this up because it is easy for investors to forget that volatility is normal for the market— especially after a year like 2017, where investors experienced the least volatile year on record. The last couple of months have reminded investors that the stock market can be volatile at times.

The chart below is of the S&P 500 (includes dividends) versus the VIX Index (a common measure of volatility) from January 1990 to March 2018. As you can see, having big spikes in volatility is not unusual and can happen during good times and bad times; and those spikes can signal a change in market direction or mean “nothing.”

VIX Index


One thing that makes this most recent bout of volatility seem more severe is the high price of the stock market, particularly the Dow Jones, which receives the lion’s share of the financial press. Let us put the recent big declines in some historical context.

On October 15, 2008 the Dow Jones dropped 733 points, but that was a 7.87% decline. On August 8, 2011 the Dow Jones dropped 634 points, which was a 5.55% decline. In February of this year, the Dow Jones had not one but two drops of more than 1,000 points in a single day.

Those were the largest single day point drops in its history. But those drops were only the 26th and 33rd largest percentage drops in the last 50 years! And if we go back to the beginning of the Dow Jones, they become even less significant from a historical perspective. I am not saying that these drops do not matter or are not scary. But hearing that we had only the 26th largest percentage decline in the last 50 years does not sound as scary as saying the Dow Jones dropped 1,175 points in a day. Despite the two largest point drops in the Dow Jones history, it was only down 1.96% (including dividends) in the first quarter of 2018. And it is up more than 1% since the second 1,000+ drop.

Now that we have dissected how “average” stock market returns rarely happen, you may be wondering what I mean that “great” can happen often. I am not talking about great investment returns, though that is The Trust Company’s goal. What I am talking about is having a great mentality. Let us discuss what having a great mentality entails.

An investor with a great mentality focuses on the three L’s of their financial plan and ignores the surrounding noise. Here are the three L’s they focus on:

1)    Liquidity – Do you have the liquidity you need for your day-to-day life? Depending on your stage in life that liquidity may come from your job, your investments, or a combination of both.

2)    Longevity – Does your financial plan meet your long-term needs and desires? Can you retire when you want? Can you have the type of retirement you want? Are you confident that you will not outlive your money?

3)    Legacy – Will you be able to leave a mark the way that you want? Maybe that is paying for a child’s or grandchild’s college so they graduate with no debt. Maybe that is having the financial freedom to give to causes (with both money and/or time) that stir your heart. Whatever it is, it is our desire to help you reach them.

Another characteristic of a great mentality is realizing that the true risk is not volatility, but in potential failure to reach one of the goals within the three L’s. If you look back at the chart, you will see times of high volatility, but with the stock market still trending upwards. During times of high volatility, the best question to ask is, “does this higher volatility affect my goals to the extent that I need to make a change?” You will find that most often the answer to that question is “no.”

By now I hope you see that while average will rarely happen (only 8.6% of the time within a 2% plus/minus of average!), that usually works out in our favor. And that we can be great by adjusting our focus. If you have never taken the time to sit down with your Trust Officer and someone from our Financial Planning team, I encourage you to do so and see how you are doing in meeting your three L’s. Eli and I also are happy to talk with you about your goals relative to your investment strategy.

At The Trust Company, we look forward to our continued relationship with you and thank you for allowing us to partner with you in reaching your financial goals.