AverageFebruary 17, 2021 -
Categorized in: IAG News
In my mind, spring begins on March 1. That leaves just over two weeks until I likely encounter disappointment that it is not warmer outside.
Our seasons certainly can bring surprises, but they tend to average out over time. Do you remember December of 2020? We only had half of our normal snowfall in December, but our total precipitation was normal and we had one thunderstorm. The high in Milwaukee on December 23 was 57 degrees.
January’s temperature was 5.7 degrees above normal, but we received 8.6” more snow than an average January. That is an unusual combination.
In February we find ourselves with the over 22 inches of accumulated snow on the ground — the deepest snow pack in Milwaukee since January 2001 – and far below normal temperatures thus far.
Combine a mild December, a warm yet snowy January, and a sincerely cold and snowy first part of February, and we will likely end up with a winter season that is considered roughly . . . average.
The average will not tell the complete story of our winter. An average never does. Averages are like erosion — they diminish highs and fill in lows to make everything smoother.
Most people find smooth and predictable alluring. When they are told the average annual return of an investment or a portfolio has been X%, it conjures up mirages of smooth going. The reality is an average annual return provides no evidence of how much risk is involved because the highs and lows have been eroded into a simplistic flat number.
This can lead to portfolio surprises that either please or disappoint. The market seasons of greed and fear transition back and forth at will, creating riskier-than-expected short-term returns that are far away from the expected calm, smooth average in peoples’ minds.
Invest during a time period like November 2020 to today and you will generally be happy with risk because it is pushing your portfolio value higher. Invest during a time period like February and March 2020 and you will generally be unhappy with risk because it is pushing your portfolio value lower. Yet, these extreme months will average out over time.
One of the keys to successful investing is time. Time can smooth out risk. Time gives averages the power to erode market highs and lows. Many investing failures occur when people fail to properly identify the amount of time needed to average out the risks they are taking.
Our disciplined investment process uses Portfolio SegmentationTM to help our clients identify these risks and align their financial plan with their investment strategy. While not perfect, it provides structure to the completely unstructured seasonal calendar the markets follow.
Hopefully I am wrong, and this spring gets off to an above average start of warm temperatures which rise from there. Who am I kidding? If that happens it will snow in May, so we have an average spring.
Quote of the week: Benjamin Graham, The Intelligent Investor: “It is when the investor demands more than an average return on his money, or when his adviser undertakes to do better for him, that the question arises whether more is being asked or promised than is likely to be delivered.”
Securities offered through LPL Financial. Member FINRA/SIPC. Investment advice offered through IAG Wealth Partners, LLC, (IAG) a registered investment advisor and separate entity from LPL Financial.
Past performance is no guarantee of future performance. In fact, the opposite can be true. The information contained in this report does not purport to be a complete description of the securities, markets, or development referred to in this material. Investing involves risk including loss of principal.
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.
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