Average Year Myth

A friend laid out his investing plan for me last week. Simple, he said. Park the money in the market, collect the long-run average, roughly 12 percent a year. Nothing wrong with the number. It is close to what the Nifty has actually done over twenty years.

So out of curiosity I pulled two decades of calendar returns and went looking for the average year. Not the average. The year where the market just quietly delivered its 12 and went home.

I found it twice.

Twenty years, and in only two of them did the index land anywhere near its own long-run rate. Every other year it was either sprinting or bleeding. Nine of those twenty years finished up more than 20 percent. Three finished in the red, and 2008 alone gave back about half. The best year was up 76. The worst was down 51. Somehow that violent spread averages out to a calm-sounding 12.

Here is the part most plans quietly ignore. The average is a summary, not a schedule. It does not get paid out in tidy monthly slices. It gets assembled out of a handful of enormous years, and if you are not holding through those years, you do not get the number. Sit out two or three of the sprints and your 12 quietly settles to a 6 without you ever making an obvious mistake.

The trouble is you cannot know in advance which year is the sprint. They arrive unannounced, usually right after the stretch that made you want to step aside. So the honest move is not to guess. It is to stay in the seat for all of them and let the average assemble itself.

That is really the whole case for a rule over a hunch. A rule stays seated. A mood gets up and leaves right before the year that mattered