Why Average Returns Can Be Misleading

Investment returns are often discussed in terms of averages. 

Average annual return or average long-term performance. 

These figures sound precise. 

They are also incomplete. 

The problem with averages 

An average smooths out variation. 

It tells us what might happen over a long period, but not how it actually unfolds. 

In reality, returns arrive in a sequence.  Strong years and weak years occur in an order that cannot be predicted. 

That order matters. 

Why timing matters more than people expect 

When money is being accumulated, poor timing can often be recovered. 

When money is being used to fund spending, recovery becomes harder. 

If weaker returns occur early: 

• More assets may need to be sold 
• Less capital remains to benefit from later recovery 
• Flexibility can reduce quickly 

This can happen even when long-term average returns look reasonable. 

The false comfort of long-term numbers 

Average returns can create confidence without context. 

They suggest stability where there may be none. 

They can also mask the range of possible outcomes. 

This is not a problem with markets.  It is a problem with how expectations are set. 

Planning beyond averages 

Good planning does not assume a single outcome. 

It looks at how a plan behaves under different return paths. 

It considers: 

• • • The timing of spending 
    • The ability to absorb early setbacks 
    • The impact of uneven returns 

This approach is less tidy than relying on averages. 

It is also far more realistic.