This is why averages can be so misleading

Oct 18, 2019

Sydney 2019, MasterMind Intensive Workshop

Have you ever considered how misleading averages can be?

For example, if someone told you to walk across a river because it was only 4 feet deep on average, you’d be justifiably upset if it turned out to be 8 feet deep with strong currents in the middle!

In our MasterMind Intensive Workshop in Sydney In October 2019 we exploded some of the most pervasive myths of wealth creation, including the problem with ‘average’ returns.

Of course, some of the most powerful things about a group intensive workshop with a room full of aspirational, highly qualified, and like-minded professionals include the connections, new projects, and sparks of inspiration that fly from the networking.

As ever, we took a in-depth look at the latest economic, business, property, and markets landscape to outline the likely road ahead and how best to be positioned for it.

One of the most critical points we tackled – and doubtless one of the least well understood (before we tackled it, at least) – was the sequence of returns, and why protection of your capital is so important.

In other words, two individuals might receive exactly the same ‘average’ return, but end up with dramatically different results.

One of the slides from our Sydney workshop:

In this scenario two investors get an average annual return of 9%, with the second investor getting the identical annual returns…but in a reverse order.

One investor turns their $1 million balance into $2.5 million, despite withdrawing $1.7 million of her capital to live on in retirement.

Tragically for the other investor, he ends up stone cold broke, even with precisely the same average returns.

You can’t spend an average return, and the sequence of returns is critical to your ability to create wealth.

Geometric growth is what you get (not the ‘average’)

Think for a moment about why the concept of an average annual return is fundamentally flawed.

If stocks compounded away at the magical 8% growth per year (as we so often hear) then the Dow Jones index would’ve increased from 66.08 points at the beginning of 1900 to 650,000 by this year, and would be pushing 1.5 million in a decade’s time (and 3.2 million a decade after that).

Of course, it’s a mathematical nonsense, and markets have done nothing of the sort.

Stocks are good, but not that good.

Bull and bear markets count!

Since 2009 the S&P 500 index has increased from a low 666 points to 3,330, which represents a tremendous period of returns totalling 400% plus dividends.

If your plan involves hoping that mean reversion doesn’t take hold from here to bring valuations (and future returns) lower, unfortunately history rather stands against you.

A few other considerations regarding the excessive optimism about US stocks, and the associated sky-high valuations which have never previously been sustained:

-low rates alone don’t justify high a CAPE ratio – they signify low expected growth

-the abject lack of earnings growth is problematic

-Federal deficits and the national debt in the US have blown out

-after a decade of expansion, there will be a US recession at some point (and the yield curve is now inverted)

This is why you need to use these 8 timeless investment principles to continue growing capital and compounding your wealth…rather just sitting back and hoping that you get the so-termed ‘average’ results.

We’ll be closing off our February 2020 coaching program intake soon, ahead of our next MasterMind Intensive Workshop on 3 April 2020 (which, by the way, we’re hosting at a larger venue).

If you’re interested in getting involved drop us a message via the links below.

I discussed the critical concept of geometric returns a little further in the following short video here

Whenever you’re ready… here are 4 ways we can help you manage your own money and go next level wealth:

1. Boom or Bust in 2021 – 20 minute online workshop for investors

Register for my next free online training - Boom or Bust? How to change your investment plan for 2021 - book in here

2. Subscribe to our Top 100 Podcast for Investors

 Listen in to our new podcast - The Low Rates High Returns Show - Apple Spotify , SoundCloud

3. Join our Implementation Program

We’re putting together a new coaching case study group this month for private investors. If you’d like to get the plan, tools and timeless principles for managing your money and creating next level wealth … just send an email to [email protected] with the word “Case Study” and we'll get you more details.

4. Work with me privately

If you’d like to work directly with me and Stephen Moriarty directly to help you map out and action your next level wealth plan… just send an email to [email protected] with the word “private”… tell me a little about your situation and what you’d like help with, and we’ll get you all the details!