Help Me Retire Podcast - Episode 4
- Mike Brown
- Aug 1, 2024
- 10 min read
The markets are never average
Show notes:
This is the Help Me Retire Podcast… with your host… Mike Brown… Senior Wealth Advisor with Raymond James Financial Services… and head of Brown Family Wealth Advisors…
Mike is the best-selling author of Your Way to True Wealth: How to Make It Happen, Make It Last, and Make It Matter…
He and his team have been helping clients pursue their dreams of financial independence for the past 30 years… and in the Help Me Retire Podcast… he’ll share his best ideas with you…
And now… here’s Mike…
At Brown Family Wealth Advisors… we focus on three types of investors… all pursuing the same goal…
We have young clients… who are trying to build wealth… with the idea they might not have to work for money for the rest of their life…
They want to be financially independent one day… something we call True Wealth… or that point where your investments are generating enough income for you to live on…
After that… the world is your oyster… you can afford to do whatever your want to do for the rest of your life…
Something worth striving for, for sure…
We also work with people who’ve done just that… and now they want to make the transition into True Wealth…
That can be a complex process… involving several important decisions…
You’ve got to make smart decisions… sometimes irreversible decisions… and a lot of them… plus you have to make a lot of those decisions at the same time…
Well, that’s kind of our bread-and-butter… because we have a proprietary… 7-step process we’ve developed… specifically to help people through that transition… with as little stress as possible…
And the third kind of investor we help… are the ones who’ve already made that transition…
They’re not working anymore… or if they are… it’s certainly not because they have to…
They’re enjoying the life of their dreams… pretty much free of financial worry…
And we try to take care of those folks for the rest of their lives… and often… we find ourselves taking care of their children and grandchildren as well…
I love when we’re able to do that…
On this podcast… which we call… Help Me Retire… we give you specific ideas for all three separate phases of that journey…
But sometimes… like in today’s episode… we talk about ideas that will help you regardless of where you are in your pursuit of True Wealth…
Timeless ideas… ideas that can help you make smarter financial decisions… ideas that can help you avoid costly mistakes…
We’re going to get to one of those universal ideas today… but first I want to remind you that you’ve now got access to literally hundreds of good ideas…
Through this podcast…
From our email newsletter… Wealth and Wisdom… which I hope you’re getting every week…
Look through our educational website… helpmeretirepod.com… which has a growing selection of content aimed at helping you plan and invest for retirement…
…such as back-issues of Wealth and Wisdom…
Recordings of the webinars we put on each quarter for clients of Brown Family Wealth Advisors…
We also post original content every week on Facebook and LinkedIn… so look for us there… follow us… connect with us… we’d love to share these good ideas with you…
Okay… so today I want to tell you a story about two star-crossed lovebirds who started dating in college… fell in love… got married… started a family… and lived happily ever after…
I’m talking about Mike and Tammy Brown, of course…
We actually met in high school… but she wouldn’t go out with me…
And I’m thinking it might have something to do with that powder-blue leisure suit I was fond of at the time…
But by our junior year in college… our paths crossed again…
We took classes together… went to football games and parties together… you know… all the things you do instead of studying…
Well, somehow… we both made it to graduation… moved to the same city… and within a year we were married…
We both went right to work, of course… building our respective careers…
I was a hot-shot local TV reporter… earning 190-dollars a week… which adds up to just under 10-thousand dollars a year…
As a registered nurse… my bride made slightly more than I did… a fact she continues to hold over my head even to this day…
Well… this was the early 1980s…
We were in love… we were working hard… making a living… and somehow managing to survive on our modest income… while absolutely enjoying life in the process…
Within a few years… our son Adam was born… completing our happy little family… the same little family that became Brown Family Wealth Advisors all these decades later…
Somewhere along in there… Tammy and I ran across an interesting article in a magazine about the average salaries that people our age were making… depending on where they went to school… and what they majored in…
Suffice it to say… that journalism and zoology were nowhere near the top of the list… we were probably making no more than 30-thousand dollars combined at the time…
But this article said that the average geography major from our alma mater… the University of North Carolina… was earning well over 100-thousand dollars a year!
Geography? Seriously?
Well… as it turns out… there weren’t very many geography majors coming out of the University of North Carolina in the early ‘80s…
And one of them was a guy named Michael Jordan… who threw away a promising career as a geographer… and opted instead to play professional basketball for the Chicago Bulls…
His annual starting salary was something like 900-thousand dollars… which skewed the averages somewhat…
And that’s just the problem with averages… they don’t always tell the whole story… at least not accurately…
It’s true with geography … it’s true with professional sports… and it’s really true when it comes to investing…
Let me give you a really simple example…
Say you invested a hundred dollars over a two-year period…
The first year… your investment grew by 50-percent…
In year two… your investment fell by 50-percent…
The average return over those two years… plus-50 and minus-50 percent… is exactly zero percent… so with a zero-percent average return over two years… you should still have your original 100-dollars…
But you don’t, do you?
You started with a hundred dollars… it grew 50-percent… so you ended the first year with 150-dollars…
The second year… you lost 50-percent… so your 150-dollars fell to 75…
That’s not a zero-percent return… it’s actually a 25-percent loss over two years… or an average negative 12-and-a-half percent a year…
That’s lesson number-one about averages…
Sit on a hot stove and stick your head in the freezer… and on average, you’re comfortable…
But that’s not how it works…
Or as Howard Marks… the well-known investor reminded us…
“Never forget the six-foot-tall man who drowned crossing the stream that was five feet deep… on average.”
That example I give just a second ago… also tells us something about percentages…
You were up 50-percent one year… and down exactly the same percentage the next… but your overall performance was negative…
What that tells you is that all the numbers being equal… losses hurt your returns more than gains help them…
A 50-percent loss requires a lot more than a 50-percent gain to break even… you have to make 100-percent to get there…
A 75-percent loss takes a 300-percent gain to get back to where you started… and it only gets worse from there…
So… all this time you’ve been thinking about how fast your money might grow… maybe you should also be thinking about how much is could shrink in one bad year…
Here’s the other really important thing to realize about averages… especially when it comes to stock market performance…
Let me ask you this… what’s been the long-term average annual return of stocks?
People who’ve owned stocks for any length of time will almost always give you an answer somewhere around 10-percent…
And they’re right… for 98 years… almost a century… from 1926 through 2023… the average annual return of the S&P 500… has been 10-point-3 percent per year…
Over the last 98 calendar years… the S&P was up in 72 of them… about three years out of every four… and the index was down 26-times… about one year out of every four…
So over those 98-years… how many times do you think the S&P 500 actually delivered that 10-point-3 percent average return?
If you said zero… you’re right… the closest it came was in 1993… 10-percent even…
So if the annual return of stocks never seems to be average… how often has it even come close?
Let’s define “close” as being within a couple of percentage points either way…
So let’s say close is somewhere between 8-percent and 12-percent in a particular year…
That’s a fairly broad range… so out of the last 98-years… would you guess the S&P 500 was up between 8 and 12-percent… half the time? 49 of 50 of those years?
A quarter of the time? Maybe 24… 25 times?
How many times in the last 98 years did stocks come reasonably close to their long-term average return?
Six. That’s all. Six times in 98-years… or about once every 16-years have we seen stocks return anywhere close to their long-term average of 10-point-3 percent…
That’s why some of us say… those average stock market returns everyone keeps talking about… hardly ever… really happen...
And one last thing I want you to know about averages when it comes to investing…
The longer you hold investments… especially stocks… the more likely you are to get those attractive long-term average returns… at least that’s what history tells us…
If you own stocks for one year… almost anything can happen… we should only expect average performance maybe once every 16-years…
You’re just as likely to be down more than 40-percent… as your grandparents were if they owned stocks in 1931… or up 54-percent… as they were two years later…
But if you lengthen your time horizon… you say I’m going to buy stocks and not sell them for five years… history tells us your returns over those five years are likely to be much closer to that nice 10-point-3 percent long-term average…
Lengthen your holding time to 10-years and beyond… and the odds of getting the average long-term returns of equities goes up even more…
Now… what should we do with all this information? How can you put to work what you now know about averages… to make yourself a better investor?
Let me give three good ideas…
The first one… is to remember that all things being equal… losses will hurt your investment performance more than the same percentage gain will help them…
A 10-percent loss and a 10-percent gain sound like two equally opposite sides of the same coin… but they’re not…
The answer, though… is not to try to avoid losing money in a given year… that’s really likely to hurt your returns…
What you want to do is to manage those risks… partly by how you invest…
…and partly by how you react to those risks… once they become real…
You can reduce the risk of big losses in stocks by diversifying your portfolio…
Instead of owning a couple of stocks… maybe you want to own a couple dozen… spread across several industries…
Maybe instead of owning just one or two mutual funds… maybe you own at least four or five… each targeted to a different investment objective…
Diversification is designed to lower the risk of big losses… and move your returns more into line with long-term historical averages…
You’re less likely to make a killing that way…
But you’re also less likely to be killed…
My second idea… is that you should invest each dollar of your portfolio… based on how soon you’re going to need that dollar back…
You’ve heard me talk about this before… we call it goals-based investing…
You’ve got money set aside to buy a car 6 months from now… don’t put that money in stocks… or there’s a good chance you’ll be taking the bus…
Or as I like to tell clients… keep your rent money out of the market…
But if we’re talking about money you’re not going to need for a while… let’s say it’s money you plan to withdraw from your portfolio for to pay for your first year of retirement 10- or 15-years from now…
History tells us that owning stocks is probably your best bet…
You’re much more likely to see the returns on that money come close to the long-term average return of stocks over 10- and 15-year periods… which has historically been much higher than what you’d have earned on fixed-income investments… which have had more year-to-year predictability… and a much lower rate of return…
What we’re looking for in almost every portfolio… is a mix of investments…
And that mix… should be based on how much you plan to withdraw from that portfolio… and how soon…
The third and final idea I’ll leave you with today is this:
If you’re going to own stocks… and I believe most investors should… you have to expect that their returns are going to be all over the place in the short term…
They’re going to be volatile… unpredictable…
It’s like watching somebody take a golden retriever puppy for a walk…
That dog’s going to chase every squirrel… jump at every butterfly… stop and sniff every fire hydrant along the way…
And yes… there will even be times when that dog wants to go backward a few steps…
But sooner or later… despite all the dog’s ups-and-downs… back-and-forths… you can count on the owner… and the dog… making it back home…
If you’re going to have stocks in your portfolio… be the owner… not the dog…
The attractive, historical return from owning stocks… has come from having patience… not expecting great returns every year…
Historically… it’s been possible to get good returns on average over time… despite hardly ever getting those exact returns in any given year…
So, it’s not about avoiding volatility… or occasional short-term losses you’re after… but having the patience and discipline to sit tight when they happen…
You know… college seems like a long time ago now…
Tammy and I built a nice little family… and we’re all now helping a lot of other nice families get where they want to be financially…
We’ve learned a lot about investing… and we love sharing what we’ve learned…
I don’t know whatever became of that Michael Jordan fellow…
But something tells me there’s nothing average about him…
And I suspect financially… he’s doing just fine as well…
Thanks for spending a little time with me today… I hope this helps you…
And if your goal is to get to a point where you no longer have to work for money…
Or if you’re already there and want to make your money last as long as you need it to…
I hope you’ll take advantage of all the resources we have for you here on helpmeretirepod.com…
Take care… and we’ll talk again soon…
Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC.
Investment advisory services are offered through Raymond James Financial Services Advisors, Inc. Brown Family Wealth Advisors is not a registered broker/dealer and is independent of Raymond James Financial Services.
Any opinions are those of Mike Brown and Brown Family Wealth Advisors and not necessarily those of Raymond James. This material is being provided for informational purposes only and is not a recommendation. There is no guarantee that these statements or opinions will prove to be correct. Investing involves risk, and you may incur a profit or a loss regardless of the strategy selected. Prior to making an investment decision, please consult with your financial advisor about your individual situation.
