Ever since I was a lad (yes, that long ago), all calculations for determining amounts of insurance, how fast savings and investments grew and how retirement income rates were deterimined, have used “average” rates of return – not even median rates – just average rates. And for about 100 years or so, people seeemed happy with that approach until the 1970s and 80s came along with rampant inflation, outlandish rates of return and then a wonderful market “correction” in the latter part of 1987.
No-one knew quite what to do, but a couple of smart young men came up with the idea to put this all on a chart so people could at least examine history – in one place – and hopefully make some better choices and assumptions while planning for their futures – and the ANDEX (copyright) chart was born! I loved it immediately (lots of pretty coloured lines and graphics too – I am easily amused)! Fortunately for our industry and our clients, this chart is not just still available, it has been expanded and updated to include even more useful information under the Morningstar banner (and no, I don’t get any compensation for saying this!
These charts (and other following competitor versions) also included the “average” rates of return for the various market segments for various time periods. While interesting to see the changes over time, I feel these “averages” actually took away from the validity of the material – which was to show that segments of the markets move randomly and that while “average” projections were interesting, they weren’t overly valuable for making long-term projections. These charts also provided all of the necessary proof that GICs and savings bonds were neither adequate on their own and that in order for a client to enjoy any reasonable probability of achieving their goals, other assets and products had to be considered.
Having received a great amount of both theoretical and experiencial education in this phenomenon, I have come to the conclusion – despite having been guilty (along with the rest of our industry) of using average growth rates in everything from growth in universal life policies, estimating future values for investments and planning for both retirement and estate distributions – sometimes 40 years into the future – this practice is now foolhardy in the extreme!
Stay tuned for the next collection of wandering thoughts as I explore this further using some actual numbers!