What Is An Average? | Travis Chick
What is in an average? Average is usually a benchmark for comparison. In the financial world, often you hear about the S&P 500 average return. In my former profession, my Earned Run Average meant whether I was a good pitcher or not (though this average has become slightly less important due to other averages). And clearly mine was too high which is why I am writing this blog! In college, we probably all focused on our Grade Point Average. You get the idea.
Average can also be a description. You can say someone is average, something is average… and normally being “average” is probably not what we all strive to be.
Average can also be a state of mind in how you approach things. I am currently reading the book “It Takes What It Takes” by Trevor Moawad and it really got me thinking about the word average (as you maybe can tell). In his book, he describes being average as “either being the best of the worst, or the worst of the best.” This might be a comforting feeling if you are attempting to do something that you know you are bad at. An example for me would be I know, at best, I am an average runner. I certainly am not the slowest in either speed or distance, and I have yet to win any gold medals for either speed or distance.
Trevor Moawad’s description of average made me reflect on the way I view the advice I give, and whether I am actually qualified to give it, or for that matter who is. Or what about the experience clients should expect and ultimately receive as part of their financial planning.
Being the best of the worst or the worst of the best reminds me of the bell curve distribution model, or normal distribution. The term gets its “bell” name because of the symmetrical bell-shaped curve plotting out random distributions on a graph. The highest point on the curve represents the most probable event in the series of data represented. How wide the bell is at the bottom is based on the probability of the next choice, or more specifically, the standard deviation from the center.
As far as the advice we give at AWM, we want to make sure that we are not giving average advice. This is why every advisor, and most of the supporting staff, has invested significant time (and resources) into developing industry-recognized expertise that spans multiple fields. It’s why we have CFPs and CPWAs to do the financial planning for athletes, it’s why we have CFAs reviewing all the analytics and research for our investments, it’s why we have multiple types of CPAs doing the tax planning and tax preparation. We also have an RMA that focuses on retirement planning, as well as a JD that helps give perspective on the legal side. We want to make sure that we holistically help our clients unlock the FULL POTENTIAL of their wealth to make the maximum impact in all areas of their life. This is not the definition of average financial advice.
Average financial advice comes from those who cannot actually advise…it comes from Brokers. And often this type of advice starts with taking an investment personality assessment. The reason for this is very specific, it guides the advisor to put you in a suitable investment model that probably thousands of other “investors” are also in at the same time. They do this for two reasons: liability and scalability. If the investment is “suitable” (for your age, liquidity, risk profile, etc.…) to them it is appropriate. It is also a very scalable way to manage money.
Recently I met with a prospective client that currently has his money at one of the large wire house brokerages. As we talked further, he realized how “average” his account was to the firm. His money is invested in the group’s standard global equity ETF portfolio and had not really been appropriately managed to consider his taxable situation. I expect the reason for this is he is also in this account with investors who have been in the model for years. If they trade the model, it could create undesired tax consequences for their largest clients, which of course is a detriment to their future largest clients.
If your asset allocation is decided upon by a risk assessment and a Monte Carlo scenario, you have just settled into getting average advice for which you are paying a premium. If your asset allocation considers all of your current and future expected assets and does real-time present value calculations of your current and future liabilities, you are getting premium advice!
As we all know, most investors will always want to benchmark their performance to either recent or historical averages. You will often hear in group settings “my advisor got me 15% this year (pick a percent).” I always have three questions when I hear that:
How much risk did you take to earn that 15%?
How is close is that 15% to helping you achieve your desired outcomes?
And was the 15% after taxes and fees?
The other part of the “average return” conversation that is often overlooked, especially when it compares to a benchmark, is the time frame that average return is considered.
Did you know that since 1926, the US stock market has had an average annual return of about 10%? With that you can see that being a long-term investor has been very rewarding and staying invested has built significant wealth. But what we also know is that volatility is normal. In just 6 years since 1926, annual returns have been within two percentage points of that average return of 10%. During that time frame, we have seen swings as high as 54% and as low as down 43%. We have also seen positive annual returns 69 times and negative 25 times. Truly understanding this “average” and the potential range of outcomes should help shift your mindset.
The outcome you desire is not average… It is the best of the best. It cannot be compared to anyone else’s outcome because it is the one you define. That outcome is not defined by your average return and should never be compared to it. Your outcome should have already factored in a discounted version of what that average return would yield, after taxes and fees. This is how you achieve clarity and financial freedom. Chasing returns is very stressful and even the best in the world are inconsistent at best of providing outperformance.
