Head in the oven, feet in the freezer

Why average doesn’t tell us enough

The average temperature doesn’t always provide us the info we need. I can have my head in the oven, my feet in the freezer with an average temperature of 21 degrees Celsius. What does this have to do with investing? Average returns don’t tell us anything about the experience needed to capture them.

Let’s look at the 20 year average annual return of the S&P 500 from Jan 1, 2000 to Dec 31, 2019.

You’ll notice the annualized rate of return (using SPY, an ETF investors can use to gain exposure to the S&P500 index) was 5.96% over the period (ignores any tax or other costs aside from the ETF management fee).

Jan 1, 2000 – Dec 31, 2019

Here we extend the period one more year to Dec 31, 2020 to capture the past 21 years. Avg. annualized return is 6.52% over this period.

Including 2020 slightly increases the annualized average to 6.52%

Not bad, nothing to write home about either. What did it take to earn this return? Was the investing experience akin to the pleasant range bound weather experienced living in San Diego? Or was it more like having our feet in the freezer, head in the oven?

Let’s break this down into the first 10 year period and the second 10 year period. And we can add 2020 for reference as well.

Jan 1, 2000 to Dec 31, 2009

As you can see from the chart above, the annualized rate of return for the decade was -1.01%. Bookended by the late 90’s tech/.com bubble and the Global Financial Crisis.

Now let’s take a look at the most recent decade ending Dec 31, 2019.

Jan 1, 2010 to Dec 31, 2019

And as a matter of interest 2010 to 2020.

Jan 1, 2010 to Dec 31, 2020

The annualized return in the second decade, 2010 to 2019 was 13.43%. In order to have earned a average annualized return in the biggest index representative of US stocks over a 20 year period of 5.96%, you would have had to do so with 10 years of -1% annualized return, and had the temperament and discipline to stick around for the next 10 years to participate in the great returns of the second decade. Simple maybe, easy, definitely not.

Extra reading for the nerds:

Here’s the best of what I’ve been reading lately (I read a lot, so you don’t have to).

Saving you a click: Value investing has underperformed Growth investing recently, there are no guarantee’s, but there is a major opportunity if a prolonged relative recovery takes place.

A Gut Punch

Sure, the last nearly three years have hurt, but at least the explanation was straightforward. A core part of our process, value, suffered. So when value rebounds, we will too, right? Well, not necessarily. To be clear, if value makes a prolonged major recovery, we certainly believe we will as well, but over short periods that doesn’t have to happen. Unfortunately, this is what we have experienced since the end of October. Regardless, it does not change my view one drop that going forward multi-factor investing is a darn good bet in a world that needs some darn good bets.

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Experienced well-being rises with income, even above $75,000 per year | PNAS

Past research has found that experienced well-being does not increase above incomes of $75,000/y. This finding has been the focus of substantial attention from researchers and the general public, yet is based on a dataset with a measure of experienced well-being that may or may not be indicative of actual emotional experience (retrospective, dichotomous reports). Here, over one million real-time reports of experienced well-being from a large US sample show evidence that experienced well-being rises linearly with log income, with an equally steep slope above $80,000 as below it. This suggests that higher incomes may still have potential to improve people’s day-to-day well-being, rather than having already reached a plateau for many people in wealthy countries.

Data aggregated by income level have been deposited in OSF () (23). Granular data are stored in a repository and are available to qualified researchers who wish to verify or extend the claims of this paper; contact the author for access information.

www.pnas.org • Share

Head in the oven, feet in the freezer

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Head in the oven, feet in the freezer

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