Average doesn’t mean Normal
We have all read or heard someone say that the stock market averages 11% a year. Unfortunately, not everyone understands what that means. According to merriam-webster.com, the word average is defined as:
a single value (as a mean, mode, or median) that summarizes or represents the general significance of a set of unequal values
Hopefully that definition with help everyone understand what an average is…no? Don’t worry, I am not sure I understand that definition and I have a BA in Mathematics. In layman’s terms, an average is the number you get when you take away from the big numbers and give to the small numbers (sounds a lot like our tax code) so that the numbers are equal. The one thing I can tell you is that average doesn’t mean normal.
What is Normal?
I found an article at Sound Mind Investing that gives a great picture of where the 11% average comes from. When you look at the chart below you will see the stock market returns since 1926. The first thing you notice is that there really haven’t been that many years where the stock market returned 11%. As a matter of fact there have been more years where the market lost 20% or more than years where the market earned 11%. When you look at the life of the stock market, you will see that last years dismal -35% loss really isn’t that abnormal. Normal for the stock market is almost anything, and that is exactly what we are seeing right now. Today the stock market was up over 230 points. Normal? I don’t think so, but I will take it.
What can we learn from this chart? It tells us that the stock market is not a place for short term investments. There will be years where the market doesn’t return 11% and that is ok. There will be years when the market returns a lot more than 11% and that is great, but you can’t quit after just one bad year. Be diligent with your investments, diversify and don’t panic. The foundation of our economy is based on the American people, and that is something in which I have a lot of faith.
chart credit: Sound Mind Investing
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Thanks for sharing such great post, according to me make a proper analysis of sectors where you want to invest and also see the compatibility and the profitability of that sectors is the perfect way to invest. The professional attitude of investment is like you should invest for long term and don’t follow the crowd.