Good morning, good afternoon, good evening. Depending on the part of the world you’re in. This is Jonathan Satovsky of Satovsky Asset Management and on today’s episode of “Seeking Wisdom, Wealth, and Wellness,” I want to talk about why I hate statistics and averages.
No one is average. Everyone is on ranges outside of average. Statistics can tell any story or can mislead any story. So, you can say, “Look, the average
market performance over time is 10% a year.” Well, that’s true, but very rarely is it a static 10%, 10%, 10%, 10%. You can get up 20%, minus 20%, all sorts of ranges, and then the investor experience doesn’t ever end up getting that average because their behavior questions the efficacy of that average because they don’t ever achieve that average. When they’re doing better, they get more ebullient and contribute more. And when things get worse, they get a little bit more despondent and question their staying power and stamina, and they’re not able to stay still. So, averages really throw people off.
What people really need to focus on for expectation purposes is the range of possible outcomes. And so if you expect that the range of possible outcomes of the year, let’s say, with money, is that in a calendar year, you can see your money decline by 30% or up 50%. That’s an example. Or you can say, well, I might want to tighten that range. I don’t want that much volatility. I’m going to go minus 10 to positive 30, for
example. And the question is, can people live with that range? And do they change that range of outcomes every day?
Today, people might want to really tighten that range. During really good times, people want to extend the range because they only view the upside. They don’t think the downside is viable. So when you think the downside is viable, you tighten the range. When you think only the upside is viable,
you widen the range, but human behavior ends up miscalibrating that.
So, be careful of averages, get expectations centered around ranges, and you too will find a way to survive and thrive during the rollercoaster of life for the next chapter, whatever may come.
Have a great day.