Why an “Average” Return Isn’t What It Seems

Back in 2016, a typical Vista portfolio (65% stocks, 35% bonds) returned close to its long-term average of 8.8%. While an average return several years back may not sound noteworthy, it’s actually quite rare in the grand scheme of things.

The graph below shows the net returns for a 65/35 portfolio since 1926. The green vertical bars represent the returns each year, and the grey horizontal bar shows the historical average, plus or minus one percent. 

65/35 Portfolio Returns: A Historical Perspective (1926–2015)

In the past 90 years, the annual return has only been within one percent of the average five times (highlighted in orange). As this chart shows, year-to-year performance can feel more “mean” than “average” (a little math humor).

The takeaway? Even with a diversified portfolio, volatility is an inevitable part of investing. The key to achieving average market returns is sticking it out through the inevitable performance swings.

The urge to react—buying high and selling low—can be powerful, which is why studies show that 80% of investors underperform the market over time. Ironically, investors who stay disciplined and stick to their strategy can expect returns that may be average compared to the market, but well above average compared to their peers.

Editor’s Note: This article was originally penned by our late colleague, Gordie Gorsuch, whose timeless wisdom lives on in Vista’s investment philosophy.