The flaw of average in stock market returns

We apply a lot of probability and statistical analysis for investment management and also our wealth management and strategy.

However, I do it with a complete system and framework that includes a heavy dose of skepticism and acceptance of reality.

There are many things we just can’t know and many other things people believe they know that just ain’t true.

Then, there are many flaws in the perception and how investors and wealth management clients use data.

Like a financial engineer, I focus on what may be wrong, what may go wrong, and how our thinking could be flawed. To achieve this level of reality, we necessary think deeply about it and share our independent thinking with other believable people who may disagree.

One of the flaws I see most often in investment management, retirement planning, and retirement income management is the flaw of averages.

The flaw of averages is the term used by Sam L. Savage to describe the fallacies that arise when single numbers (like averages and average returns for stock and bond markets) are used to represent uncertain outcomes.

A great example of the flaw of averages is a 6 ft. tall statistician can drown while crossing a river that is 3 ft. deep on average.

the flaw of averages stock return

Too often we see the reliance on historical “average returns”.

Yet, almost 80% of rolling decades since 1900 have delivered returns 20% above or below the historical average

So, there is an 80% chance that the total nominal return for the next decade will be either above 12% or below 8%.

And, then, there could also be underwater periods that are much longer and deeper than the average portrays. These periods may cause investors to tap out when the water gets too deep, or the deep water lasts too long.


You can probably see why I think it’s essential to tactically manage risk to actively direct and control the possibility of loss and control drawdowns.

Knowing what I know, I don’t offer investment management any other way.

It’s why we describe it on the front page of our website at Shell Capital.


Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Global Tactical.

Mike Shell and Shell Capital Management, LLC is a registered investment advisor focused on asymmetric risk-reward and absolute return strategies and provides investment advice and portfolio management only to clients with a signed and executed investment management agreement. The observations shared on this website are for general information only and should not be construed as advice to buy or sell any security. Securities reflected are not intended to represent any client holdings or any recommendations made by the firm. Any opinions expressed may change as subsequent conditions change.  Do not make any investment decisions based on such information as it is subject to change. Investing involves risk, including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results. All information and data is deemed reliable, but is not guaranteed and should be independently verified. The presence of this website on the Internet shall in no direct or indirect way raise an implication that Shell Capital Management, LLC is offering to sell or soliciting to sell advisory services to residents of any state in which the firm is not registered as an investment advisor. Use of this website is subject to its terms and conditions.

Flaw of Averages

In Declining (Low) Volatility = Rising (High) Complacency I said:

“The VIX has a long-term average of about 20 since its inception. At this moment, it is 11.82. It’s important to realize the flaw of averages here, because the VIX doesn’t actually stay around 20 – it instead averages 20 as it swings higher and lower.”

The flaw of averages is the term used by Sam L. Savage to describe the fallacies that arise when single numbers (usually averages) are used to represent uncertain outcomes.

A fine example of the flaw of averages involves a 6 ft. tall statistician who drowns while crossing a river that is 3 ft. deep on average.




You can probably see how assumptions using averages can get us in trouble. It only takes a little to be “too much”… and that is mostly likely a problem when we expect the average and the possible range is much wider.