Lundin Gold April 2024 Corporate Presentation v4.pdf
Flaw of averages
1. ASSET
CLASS iQ
The Flaw of Averages
By Sheldon McFarland, VP, Portfolio Strategy and Research
We hear the term “average rate of return” a lot when it comes to but coping with the roller coaster ride that produced that 10% can
investing, but do we really understand what “average” means? be tough. All too many investors panic and sell…significantly
lowering their average returns.
Imagine a traveler who comes to the edge of a swift-flowing
river he must cross. A sign at the water’s edge reads “average S&P 500 Index Returns
depth 3 ft.” Since he is more than six feet tall, he’s not worried 60%
and begins to ford the river. Half way across the river and
knee deep in water, he takes a step and falls into a deep hole 40%
and is swept away.
20%
Unfortunately, our traveler misinterpreted what average depth
0%
truly means, not realizing that the river’s actual depth at any
point could be far above or below the average. -20%
Just like our traveler, many investors misinterpret average rates -40%
of return — sometimes with disastrous consequences. — Annual Return — 12% — 10% — 8%
-60%
It is what Stanford University Professor Sam Savage calls the ’26 ’36 ’46 ’56 ’66 ’76 ’86 ’96 ’06 ’11
Flaw of Averages1. He explains, “Plans based on the assumption
that average conditions will occur are usually wrong.” If you, or The S&P data are provided by Standard & Poor’s Index Services Group. The
S&P 500 (Standard & Poor’s 500 Index) is a broad-based US equity index. The
your financial advisor, fail to account for uncertainty in your S&P 500 Index is an unmanaged market value weighted index of 500 stocks
plan then you may fall drastically short of your goal. that are traded on the NYSE, AMEX, and NASDAQ. The weightings make each
company’s influence on the index performance directly proportional to that
The truth is that few investments ever earn their average long- company’s market value. Indexes are unmanaged baskets of securities that
term return in any given year. While you could have an average are not available for direct investment by investors. Their performance does
long-term return of 8%, during one year you may earn 14% not reflect the expenses associated with the management of actual portfolios
including, but not limited to, tax deductions and management fees. Past perfor-
and in the next you might earn only 2%. Returns tend to be mance is no guarantee of future results, and values fluctuate. All investments
much more volatile and earn significantly more or less than involve risk, include the loss of principal.
their average.
The ups and downs of the market can also lead to very different
Take the S&P 500’s annual returns since 1926, which have averaged outcomes, depending on when you invest and for how long.
around 10%. Surprisingly, in that more than 80 year period,
the S&P never actually earned 10%. As you can see, returns For example, let’s say you have a hypothetical $1,000,000
were all over the place, with lots of significant ups and downs. portfolio that grows, on average, 10% per year. Let’s also
In only five years were any returns even close to 10%. assume that you withdraw $9,000 adjusted for inflation every
month from this portfolio to cover living expenses for the
Most of us would be delighted with a 10% long-term return, next 15 years.
1
Savage, Sam, The Flaw of Averages, San Jose Mercury News, October 8, 2000.
