The rarity of an “average” year

December 23, 2010 - John Osbon (1 mins to read)

Barring any big market swings in the last few days of 2010, the year’s performance will be pretty average. The S&P 500 is up about 9 percent for the year, very close to the index’s annualized total return of 8.8 percent for the period 1988 to 2009.

An average year doesn’t seem like it should be an oddity, but it is. This will likely be only the fourth time since 1988 that annual total return for the index has fallen between 6 and 12 percent. Return has been negative five times over that span and up more than 20 percent nine times. The best year was 1995 (up 37.58 percent); the worst was 2008 (down 37.00 percent).

By computing averages, we can capture long data sequences in just a few statistics. But we must be careful about how we use those averages. For instance, if we create a retirement portfolio based on the idea that the S&P 500 will go up a predictable and orderly 9 percent each year, we are ignoring risk and will likely be in for an uncomfortable ride with big peaks and valleys. The timing of those variations may result in a total portfolio value at retirement far above or below our average-driven expectations.

Instead of expecting average, investors should expect a probability range of returns. Monte Carlo analysis is a powerful computer simulation tool that runs thousands of permutations of performance based on the risk and return characteristics of a portfolio. Its output is a range of outcomes with probabilities attached. This data presents a much more realistic basis for planning. I feel it should be at the heart of all portfolio planning.


[hs_action id=”2404″]

All historical returns from Wikipedia.

SPAN.title { font-size: 12px !important }

SPAN.title { font-size: 12px !important }



Weekly Insights

delivered to your inbox


This communication may include forward-looking statements. All statements other than statements of historical fact are forward-looking statements (including words such as “believe,” “estimate,” “anticipate,” “may,” “will,” “should,” and “expect”). Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. Various factors could cause actual results or performance to differ materially from those discussed in such forward-looking statements.”

“Historical performance is not indicative of future results. The investment return will fluctuate with market conditions.

Past performance is not indicative of any specific investment or future results. Views regarding the economy, securities markets or other specialized areas, like all predictors of future events, cannot be guaranteed to be accurate and may result in economic loss to the investor.

Investment strategies, philosophies, allocations and holdings are subject to change without prior notice.

This communication is intended to provide general information only and should not be construed as an offer of specifically tailored individualized advice.

While the Adviser believes the outside data sources cited to be credible, it has not independently verified the correctness of any of their inputs or calculations and, therefore, does not warranty the accuracy of any third-party sources or information.

Adviser does not endorse the statements, services or performance of any third-party vendor.

Unless stated otherwise, any mention of specific securities or investments is for hypothetical and illustrative purposes only. Adviser’s clients may or may not hold the securities discussed in their portfolios. Adviser makes no representations that any of the securities discussed have been or will be profitable.

Any IPO alerts are purely informational and should not be construed as recommendations to invest.

Adviser is not licensed to provide and does not provide legal, tax or accounting advice to clients. Advice of qualified counsel or accountant should be sought to address any specific situation requiring assistance from such licensed individuals.

Any case studies or hypothetical client profiles are for demonstration purposes only. They illustrate the breadth and depth of the many clients we represent at various life stages. Any similarities to actual Adviser’s clients past or present are strictly coincidental. Individual advice and results will vary based on each client’s circumstances, objectives and prevailing economic conditions.

Weekly Articles by Osbon Capital Management: