BUNK 5
YOU SHOULD EXPECT AVERAGE RETURNS
One reason folks fall prey to investing con artists (more on this in Bunk 11) is they buy into the bewitching idea that consistently high and positive returns, year in, year out, are possible. Not just positive—but positive, high, smooth, and steady—dreamlike. Far too many folks are scammed (or make bad investment decisions that hurt later) because they believe it’s reasonable to expect performance of 10 to 12 percent year after year. And why not? They know stocks over the long term have done that on average—give or take a bit depending on what time period you measure.
So just what’s the harm in averaging 10 percent a year, anyway? Not a thing—over long time periods. The problem is certain scammers claim to get 10 to 12 percent each and every year (which is what Bernard Madoff claimed). Not on average. Regularly! Market is up 35 percent? They get 12 percent. And if markets fall 15 percent, they still get 10 percent. No surprises. No big up years, but no big down years either—ever. Smooth! Some poor folks believe the guy they found is just that good.
Some con artists bag victims by playing straight to greed. Unbelievably, they promise hugely above-average returns with little risk. But more play to humans’ innate fear of volatility (and a little bit of greed) by claiming to get smooth, slightly above average but very, very consistent returns. Afterward, some of Madoff’s victims claimed they thought they were being conservative by not demanding hugely above-average returns! But getting long-term average returns every year is a pipe dream—and that is easy to verify yourself through debunkery. Fact is: Average returns aren’t normal. Normal yearly returns are extreme.
The average returns are made up of years that mostly vary wildly from the average. Again, normal individual-year returns tend toward extremity.

Normal Returns Are Extreme

Table 5.1 shows annual returns for the S&P 500 broken into return ranges and occurrences. Right away, you see “big” returns (annual returns above 20 percent) and negative returns together happen much more often than “average” returns. Individual years with returns close to “average” don’t actually happen very often. One point the table doesn’t show is stocks have returned anywhere from 10 percent to 12 percent in a year (which scammers want you to think is normal and not a red flag) only five times—1926, 1959, 1968, 1993, and 2004.1 “Average” returns just aren’t the norm. In fact, stocks are up big more than any other outcome—38.1 percent of the time. About two-thirds of all years, stocks are either up big or negative. Again, normal annual returns are extreme. It is hard to get people to accept the degree to which that’s true.
Table 5.1 Average Returns Aren’t Normal—Normal Returns Are Extreme
Source: Global Financial Data Inc., S&P 500 total return from 12/31/25 to 12/31/2009.
007
It’s possible to aim to get smooth, consistent returns. But you likely aren’t going to get anything close to the market’s long-term averages. If you want smoothness and consistency, you must accept a lower return expectation from bonds and cash-like investments. That’s it!
And if you want to average about 10 percent a year, that’s possible too—but you’re going to have individual years with huge volatility around that. And it’s still quite difficult to achieve even the market’s long-term average. First, most investment managers fail to beat markets over time. Second, investors tend to find ways to harm themselves by chasing heat, switching strategies, or otherwise making decisions based on short-term emotions that impact their long-term performance—and effectively in-and-out the market and categories at exactly the wrong times. (Bunks 7, 17, and 18.)
But tactically, it’s quite easy to get average returns in the long run. Just set your portfolio up to be mostly market-like and let it be. You won’t beat the market, but you can get what the market doles out, which, over time, is likely to be better than bonds or another similarly liquid asset class—or what most of your friends do—or what most professionals do.
But that means experiencing some uncomfortable down years and big up years. Let me say that again: To my knowledge, no one has ever achieved market-like returns without some market-like downside. If you want to achieve something close to stocks’ long-term average, you must accept downside volatility. No way around that. Normal returns are extreme.
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