How Averages Lie

Beginner, Theory

Perhaps the perennial top rated roller coaster in the United States is Millennium Force at Cedar Point in Sandusky, Ohio.  With a max drop of 300ft at 80 degrees and a top speed of 93mph, reviews are predictably glowing and full of adrenaline.


“Best ride in the world!! It’s so fun, you feel like you’re flying.”


“The best ride there! So fast, so extreme, amazing drop. No matter how long the line is make sure you go on the ride.”


Just as interesting to me is a stat you won’t find.  At a length of 6595 ft and a duration of 2:20  from start to finish, the average speed of the coaster is a pedestrian 32mph and would be considered safe in your home neighborhood.  If some robotic fan only judged amusement park rides by average speed, the drive there would blow it out of the water.  And a grandmother picturing a smooth leisurely ride would be in for a very rude awakening.  Clearly, averages don’t tell the whole story.

So why is it that when discussing investing people love to reduce portfolio performance down to a single long-term average?  Just like discussing roller coasters only in terms of averages, that masks the entire experience of the ride!

As an example, let’s compare two portfolios with identical compound annual real returns of 5.5% per year since 1972:

Swedroe vs Boglehead chart

Think of the colors as a topographical map of the coaster with the dark green highs and dark red lows.  While they ended up in the exact same place in the long run, they experienced very different rides to get there.  The stock heavy portfolio had deeper drawdowns and multiple rolling decades of negative real returns while the Swedroe portfolio had an identical long-term compound average real return with only 30% stocks and a relatively calm bump-free ride along the way.

What type of ride you prefer with your own investments is completely up to you.  But if there’s one thing I’d recommend for all investors, it’s to take the time to look beyond the average returns and get a sense for the big picture.  When it comes to your life savings a thrill ride may not be your goal, and most people might choose differently if they could truly see the ride before getting on rather than just reading the stats from a brochure.

Exposing portfolio dynamics beyond mere averages is one of my core goals on this site.  Take the calculators for a spin, and keep in mind that asset allocation is about so much more than maximizing average returns.  Understand the ups and downs of your portfolio before you get to the first big drop!

2 thoughts on “How Averages Lie

Comments are closed.