How Outliers Disrupt Financial Planning

Recently, a large portion of the U.S. was gripped by the now infamous “polar vortex” which sent temperatures plunging well below zero and wind chills even deeper.  Understandably, people had to change their routines as schools and events were cancelled with conditions outside being downright dangerous.  At our home office in Lexington, KY wind chills got down to a cozy -11.  Fortunately, these temperatures are not common and fall way outside the bounds of “normal.”  

According to U.S. climate data, the average temperature in Lexington, KY during the month of January is 41 degrees.  Should knowing the average temperature set rigid expectations?  Imagine my disappointment if I walked outside every day in January expecting 41 degree temperatures (the average) only to be greeted by a frigid -11.  Clearly, the average experience includes some wild outliers.

If you’re still with me hang on, I promise this is not a weather blog.  As an investment advisor and financial planner, I’ve long heard clients reference that stocks average 10% a year and believe it or not, the historical evidence backs that up.  The S&P 500 index has an average rate of return of approximately 10% over the last 100 years.  However, if you go into each calendar year expecting 10% returns from your stock portfolio, you’ll be sorely disappointed.  Much like our weather of late, the S&P 500’s average return is a function of some pretty wild extremes. 

The average person doesn’t mind investment returns (or temperatures) that are above average – it’s the below average experience that can cause panic and fear.  From a weather stand point, people flock to their local grocery store buying all the bread and milk they possibly can (which I’ve never understood).  From an investment perspective, you may be tempted to “get out of the cold” and sell when a market “polar vortex” comes. While I can’t offer advice on stocking your cupboards for winter, I can advise that preparing your portfolio for below average periods of return is a worthwhile exercise.  Do not expect that above average returns will continue forever – they likely will not.  Similarly, do not despair when below average returns come, they likely will not last long either.  Trust that the average holds true and prepare yourself accordingly.

At Unified Trust, we focus on long-term growth balanced with downside risk management for our clients.  This is important, especially if you’re a retiree to help ensure you’re not selling stocks in periods of underperformance to meet liquidity needs.  Poor liquidity planning can have a damaging impact on the longevity of your portfolio.  Not sure if your retirement plan can withstand the next market chill?  Let us offer a fiduciary review of your portfolio and help you prepare accordingly.

Back to Blog

Subscribe to our Blog

Receive each new post by email, making it easy to stay up to date on industry news, trends and important insights from the UnifiedTrust team.

Contact Us Today

Whether you have a question you'd like us to answer or a brilliant idea you're ready to share, the team at Unified Trust is here to listen.