Why Averages Do Not Tell the Whole Story in Investing

When people talk about investing, they often reference average stock market returns, average portfolio growth, or average annual performance. You will hear statements like the market averages ten percent per year or a diversified portfolio averages solid long term returns. While these averages sound reassuring, they rarely reflect what investors actually experience. In real world investing, averages hide volatility, sequence of returns risk, taxes, behavior, and timing. For business owners and long term investors, understanding why averages can be misleading is critical to making better financial decisions.

The Problem With Averages

An average smooths out reality. It takes years of uneven, unpredictable returns and compresses them into a single number. That number looks clean, simple, and comforting. But investing is not clean or simple.

Consider two investors who both earn the same average return over ten years. One experiences steady moderate growth. The other experiences large gains early and deep losses later. On paper, the average return looks identical. In real life, the outcomes can be drastically different, especially if withdrawals, taxes, or business cash needs are involved.

Averages ignore the path your money takes to get there. That path matters more than most people realize.

Volatility Changes Outcomes

Volatility is not just an emotional issue. It directly affects results.

When returns swing up and down, losses require larger gains to recover. A fifty percent loss requires a one hundred percent gain just to break even. An average return calculation does not show this asymmetry.

For investors who are adding money, pulling money out, or relying on their portfolio for income, volatility can materially change outcomes even if the long term average looks attractive.

This is especially important for business owners who may need liquidity during downturns or who invest unevenly depending on cash flow.

Sequence of Returns Risk

Sequence of returns risk is one of the clearest examples of why averages fall short.

If you experience poor returns early in retirement or during a period when you are drawing from your portfolio, the damage can be permanent. Even if average returns over time look good, early losses combined with withdrawals can significantly reduce the longevity of your wealth.

Two portfolios with the same average return can support very different lifestyles depending on when gains and losses occur.

This risk is almost invisible when looking only at averages.

Behavior Is Not Average

Investors do not behave like spreadsheets.

Fear, greed, overconfidence, and hesitation all influence decisions. Many investors buy after strong performance and sell after declines. The average market return assumes perfect behavior. Real investors rarely act that way.

The result is a gap between market averages and investor results. Studies consistently show that the average investor underperforms the investments they own, largely due to behavior and timing decisions.

Averages assume discipline. Real life does not.

Taxes and Fees Are Real

Investment averages are usually quoted before taxes and before fees. Your personal return is not.

Taxes vary based on account type, income level, timing of gains, and planning decisions. Fees vary based on implementation, fund selection, and advisory structure.

Two investors can earn the same average gross return and end up with very different net results. What you keep matters far more than what the market averages.

Why This Matters for Business Owners

Business owners face additional complexity. Cash flow is uneven. Income may spike or disappear. Large expenses and opportunities arise unexpectedly. You may be investing personally while also reinvesting in your business.

In this context, relying on average returns can lead to overconfidence, poor liquidity planning, or unnecessary risk.

A better approach focuses on goals, flexibility, downside protection, tax efficiency, and coordination between your business and personal finances.

A Better Way to Think About Investing

Instead of asking what the average return is, better questions include:

How much volatility can I tolerate without changing behavior?
What happens if returns are poor early on?
How does this portfolio support my cash flow needs?
How tax efficient is this strategy?
How does this fit with my business and long term goals?

Investing should be personal. Averages are not.

Final Thoughts

Averages make investing sound easier than it is. They strip away the complexity that actually determines success or failure. While long term growth matters, the journey matters just as much as the destination.

At Cool Wealth Management in Phoenix, Arizona, we help business owners move beyond averages and build investment strategies that reflect real life, real goals, and real risks. Because your financial future deserves more than a single number.