The Annual Returns chart sorts the frequency and distribution of every inflation-adjusted annual return for a given asset allocation. Use this to study just how often a portfolio actually makes the average return it advertises, to visualize the volatility of a portfolio, and to prepare yourself for how frequently even the best portfolio will post an annual loss.
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Overview
The Annual Returns chart is a histogram that illustrates the distribution of real-world inflation-adjusted annual returns. Think of each column as a bucket, and picture going through the historical record and sorting each annual return in the appropriate bucket. Blue columns represent gains and red columns represent losses. Visualizing returns this way is helpful for understanding the natural variability of any investment decision.
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Calculations
Average Return
In contrast to most calculations on the site that find the compound return, the average return here is the traditional arithmetic mean that divides the sum of every annual return by the number of years in the database.
Standard Deviation
Standard deviation is a statistical measure of variability. The larger the number, the wider the distribution of returns. By definition, the annual return fell within the range marked on the chart covering +/- one standard deviation from the average 68% of the time. However, keep in mind that standard deviation calculations assume a normal distribution of returns. Study enough portfolios and you’ll find that investments don’t always behave like that, so be sure to take the implied likelihood of returns with an appropriate grain of salt.
Loss Frequency
To help put normal investment variability in a context non-mathematicians can appreciate, the chart also calculates how often the portfolio lost money. The loss frequency is the total cumulative percentage of all of the red columns. The goal is not to discourage people from investing, but to show that occasionally losing money is a perfectly normal part of investing and is absolutely nothing to panic about. Making money every single year is not only unrealistic but also completely unnecessary to reach your long-term goals.
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