From as young as I can remember, winter has been one of my favorite seasons to be outside — from sledding, to fort-building, to simply walking in the peaceful serenity of a world being blanketed by snow. I will even admit to you that I may enjoy shoveling occasionally.
Counterbalancing this appreciation for the white fluffy stuff is my aversion to cold. I much prefer temperatures over 80 degrees than under 20. The only reason I will tolerate the cold of winter is if I am rewarded with the beauty and joy of snow.
Over the last 30 years, southeast Wisconsin has averaged 48.7 inches of snow each winter.
Mentally, that average is the minimum amount of snow I deem acceptable to put up with the cold. Anything less than average is disappointing.
Mathematically, that is foolish. We should only get above average amounts of snow one out of every two years. Just because more snow is better does not mean I can reasonably expect above average every year.
My unreasonable expectations have made for a rough two years. Both this winter and last have been giant disappointments. However, mathematically, I understand that in some future years there will likely be an above average snow-filled winter to bring us back up to average. I have something to look forward to!
Investors go through the same mental gymnastics with the financial markets. Some years the financial markets provide returns below their long-term averages. This leads to disappointment.
Some years – perhaps several in a row – the financial markets provide returns above or significantly above their long-term average. While this leads to genuine happiness, it also requires some future years of below average returns to maintain the market’s long-term average.
Next Monday is February 28. Mercifully, in my mind, that is the end of this deplorable winter. Given that we need an above average winter to offset the last two, my expectations for next winter are pretty high.
However, I humbly acknowledge there are no guarantees next winter will meet my expectations and the outcome is beyond my control. Just like the financial markets.
Quote of the week: Jason Zweig: “Regression to the mean is the most powerful law in financial physics: Periods of above-average performance are inevitably followed by below-average returns, and bad times inevitably set the stage for surprisingly good performance.”
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Any opinions are those of IAG and not necessarily those of LPL Financial. Expressions of opinion are as of this date and are subject to change without notice. This information is not intended as a solicitation or an offer to buy or sell any security referred to herein. No strategy assures success or protects against loss. Investing involves risk including loss of principal.