The Problem with Averages (& the Solution)

FIVE THINGS YOU SHOULD KNOW

1. Equity Markets – were mixed this week with U.S. stocks (S&P 500) down -0.28% while international stocks (EAFE) rose 0.27%.
   
   
2. Fixed Income Markets – were mixed with investment grade bonds (AGG) down -0.28% while high yield bonds (JNK) rose 0.27%
   
   
3. Inflation Sets Records – CPI data released this week showed that the annual inflation rate rose to 7% in December, the fastest pace seen in 40 years. Fed Chairman Powell attempted to quell concerns in his speech this week reassuring people that the central bank is more than capable of reducing the pace of price rises without damaging economy. With a recent Goldman Sachs forecast suggesting there could be up to 4 rate hikes this year, it appears the topic of Fed intervention will be a keen talking point through 2022.
   
   
4. Omicron Supply Chain Difficulties – the rapid uptick in Omicron transmission has already led to a global shortage of available workers in many key industries. China’s implementation of their Covid-Zero Policy has seen broad-based restrictions and port shutdowns, further amplifying supply issues. Elsewhere in Coronavirus news, European Union regulators have warned that frequent booster shots could potentially weaken the immune system.
   
   
5. Key Insight – [VIDEO & ARTICLE] Dave Gordon highlights some interesting WWII stories and facts around averages to discuss the problem with trying to design your life around them, while also discussing the three key steps to creating real solutions that can get your financial life on track.
   
   

INSIGHTS for INVESTORS

The Problem with Averages (& the Solution)

Dave Gordon

Few entities in the history of the world have operated on more statistical data than the U.S. military. The Civil War Study, for example, helped to mass produce and outfit U.S. soldiers when they needed to ramp up production of uniforms for more soldiers than ever before. On the flip side, this has also been the vein for the U.S. military when developing things like the first airplane cockpit in 1926. In fact, the use of statistical averages mostly worked, up until the formation of the U.S. Air Force and mass recruitment of fighter pilots in the late 1940’s – pre-World War II.

This influx of new fighter pilots and fresh planes off the supply lines also generated a significant uptick in deaths (whether it be in war or in training). This was alarming to the military, so they studied it. They soon realized the problem was, while they intended to build the airplane cockpit to fit everyone, the reality is it fit nobody. Literally zero soldiers were perfectly “average” size based on the 10 standardized measurements they used to design the aircraft’s cockpit sizing.

The military’s solution to this was creating the ability to make small alterations in the cockpit itself with things like adjustable seats (like what we see in cars now), foot pedals, equipment, etc. These relatively small (and surprisingly cost effective) adjustments made massive impacts for the Air Force. They led the way in creating the most diverse, expansive, lethal Air Force in the history of the world. Or in the words of our airmen – “Aim High....Fly. Fight. Win!”

So, you may be asking yourself what this has to do with your financial life? In reality, everything. We all fall victim to statistical averages at times. When we have no other rational source to benchmark our current state of affairs, we Google things, research, and inevitably source some article spitting out rule of thumb “statistical averages” we should all live by. These averages set our expectations on a go-forward basis and become the “benchmark” we should expect year in and year out. Let me give you a few examples we consistently address with clients:

1. What is the average return we should expect each year in our portfolio? – Well, the average calendar year return since the inception of the U.S. Stock Market in 1926 is just north of 10%. How many times do you think the U.S. Stock Market has actually returned between 8-10% in any given calendar year since inception? 5 times in almost 100 years. Oh, and that’s only if you want to own a non-diversified portfolio of only U.S. stocks. Roughly zero of our clients are invested this way since we believe in adequate diversification....so even this statistic is pretty much worthless outside of this key takeaway – you’ll get the averages you need over several years of being invested, but you’ll almost never get the expected average over short periods of time. Full Stop.
   
   
2. Do I fit the mold of your average client? – This tends to be a consistent question we field as we go through our planning process with clients. And who can blame them? When you haven’t had a partner help define and establish you as your own benchmark, what else do you have for a comparison? But really what do your neighbor’s goals, or our “average client” have anything to do with you?
   
   

As we often discuss, each client’s needs and style concerning how they want their portfolio to L.I.V.E. (liquidity, income, volatility and expected return) are all different.

Ultimately, these questions, and dozens of others like them, are asked by so many of our new and prospective clients because they aren’t getting what they need from their current advisor or, Dr. Google isn’t doing them any favors. However, we know every person that walks through our door is really asking these to get to the brass-tax of the following:

1. Can I live the life I want?

2. Am I prepared for Life’s surprises?

They just don’t know the right questions to ask yet.

The Solution

The solution lies in a partner with a personalized and consistent process that has the willingness to invest significant time and resources on the front end of the relationship to build you an appropriate benchmark based on your goals and personal investing style. YOU are your own benchmark.

Maybe you just haven’t spent the time with a partner to truly understand, define, and rank your most important goals. Perhaps you haven’t allocated time to dig into the data to quantify if you are “on track” for the specific financial goals you’ve set out to achieve. Whatever it may be, a good financial partner can act as a co-pilot along the way to help define the actions needed (and hold you accountable to them), and steer you in the right direction within your plan and portfolios.

That’s the value of personalized advice. If you haven’t found it out in the marketplace yet, we’ll be here when you are ready. We’re not going anywhere.

To your health and living life richly,

Dave and the team at TEN