The Illusion of Market Averages
The market's growth fantasies—discover how the stock market's ups and downs affect your financial dream.
A warm hello to all new readers! I’m glad you are on board.
New here? I’m Michael and on a mission to make beating the stock market as easy for you as choosing your favorite ice cream. I write an algorithm that does exactly that.
Read the short story here. And the journey so far here.
The average growth rate tells you about the temperature of the room, but not about the chills and fevers of those dancing naked or dressed properly.
Let’s debunk another market myth.
They say the S&P 500 has been pumping out profits with an average growth of 8.11%, and the Dow Jones isn’t far behind with 7.4% over the last 26 years. You’ve heard the finance gurus throwing around numbers like party favors, right? Yeah, on paper, those figures look slick. But let’s get real—those numbers are only telling us half the story.
Picture the stock market not like a disciplined athlete running a marathon, but more like a tipsy partygoer stumbling home. Sure, they’re making progress, but it’s anything but a straight line. Sometimes, they take a tumble, lie down for a bit, then stagger back to their feet and keep going.
Why is that important for you?
Well, because those average growth rates everyone loves to quote, they’re like party tricks: simple, neat, and misleading when it comes to understanding how your investments will grow.
Averages are a marketer’s best friend—easy to grasp and even easier to sell.
So, people hear “8.11% growth” and think their money’s going to sprout wings and fly like it’s on an overdose of Red Bull.
Let’s break it down with an example.
Say we’re observing the S&P 500, and we’re amazed by that 8.11% average growth. With some quick math, you’re dreaming of turning your investment into $75,947.34 after 26 years. Sounds fabulous, right? If you also re-invest all the dividends.
But hold up—let’s look at how things shake out in the real world, where our investments grow more like our drunken friend than a rocket ship. Here are the percentage changes of the S&P500 over the past 26 years up to the end of 2023.
(Note: I decided to calculate the returns without dividends because not everyone reinvests them. If you prefer to calculate with dividends, be my guest.)
When we apply the way money compounds over time (without dividends), we’re looking at $50,932.58 at the end. Yep, our growth rate limps at about 6.46%.
So, where’s the disconnect?
Remember, our average was assuming we were on a leisurely, uninterrupted stroll forward. But investing is more like a wild drunk night out—zigzagging, stumbling, occasionally backtracking. Our gains and losses are a drunken dance, leading to a reality that’s far from the steady climb we imagined.
So, what’s the takeaway?
Instead of getting starry-eyed over mathematical averages, switch gears and get comfy with the compound average growth rate (CAGR - the illustrated blue line in the chart above). It’s your ticket to understanding the true speed you’re walking home from that party night.
By switching our focus to CAGR, we’re ditching the rose-colored glasses and getting a clear-eyed view of our financial road ahead.
With the CAGR, instead of the mathematical average, we end up with almost matching numbers.
Now what?
Navigating the stock market is a bit like attending a masquerade ball. And it’s not black or white. What if you choose to take the dividends and pay your bills with them? You might enter the room dazzled by the glitz and glamour, tempted to believe that every whispered promise of wealth is as golden as it sounds. Just as in real life, as the night wears on, you’ll see masks or make-up slip and truths revealed—the market, with all its ups and downs, is more of a dance, a rhythm you learn to move with rather than against.
Remember, those headline-grabbing average returns are just - marketing headlines. Adjust them to your life situation. A snapshot that misses the fuller, more complex picture of how investments truly grow over time. Like our drunk friend weaving home from the party, your investments will have their own unique stories, missteps, and recoveries.
Understanding this doesn’t just prepare you for the journey; it enriches it. Knowing the real pace at which your money can grow, and recognizing the signs along the way, turns you from a passive bystander into an informed market participant.
So, what’s next?
Stay curious. The world of investing is filled with lessons that are as much about human emotion and behavior as they are about numbers and charts. Read widely, ask questions, and maybe even find a community of fellow travelers. Whether it’s diving into the classics of financial literature, or following a few well-chosen Substack’s here, every step you take is one more piece of the puzzle.
The goal isn’t just to accumulate wealth. It’s building a healthy, informed relationship with your money. So as you move forward, take the long-term view. One thing is sure, markets will rise and fall like good music, so lace up your best dancing shoes and keep smiling.
Progress
Remember that PayPal thing I had to wait for? They turned on the feature and in sandbox-mode everything works now.
I dug deeper into how to make nice pictures with data. As you can see, I’m still searching for “my style”. I’ve posted this picture on Notes where you can see how the Top 10 stocks raced through the market and changed places along the way.
Plan
Create more data pictures.
What’s on my head
Last week was my wife’s birthday, and we celebrated it with an incredible hike. I’ve been echoing on that experience a lot. It had a philosophical effect on me, grounding me in the present, clearing my mind, and infusing me with a surge of positive energy. It’s a reminder that, amidst the hustle of work, it’s crucial to make time for the things we truly enjoy.
There’s something magical about being out in nature. Nature exists in its own, unbothered way — it’s unconditional, not swayed by emotions, and follows its own set of rules. This unapologetic existence makes it so mesmerizing. Being in such an environment, where you can live life on your terms, underscores the value of pushing through the hustle. It’s in these moments, when you take a hike, surrounded by nature, that you’re reminded of the importance of carving out our paths to gain new perspectives.
Nuggets I’ve enjoyed
Energy is a thing - and it moves the world - see how it impacts Mexico
A group of people sabotaged the Tesla plant in Germany - here is their “why”
Have a great day StockStar!
Hit that heart if you love music!
Michael
If you think somebody should read this, share it, and make them happy.
Recommend The Economy Rocket to your readers and friends
I share my stock investment story without sugarcoating – you get the good, the bad, and those tricky ego trips. I'm developing a service with a mix of smart code and proven investment strategies, making stock analysis a thing of the past if you wish. Because life offers so much more beyond the confines of stock analysis.
Disclaimer:
The information in this article is my personal opinion. I’m not a certified investment professional. It is not consulting, nor does it constitute investment recommendations.
I do my research carefully and follow my personal investment strategy.
The stock market is a complex building with its own rules. There are no rules set in stone, like the rules of physics.
Therefore, use the contents of this newsletter at your own risk and do your own research as well. Investing in the stock market can lead to a total loss of the capital invested.
One quote struck me immediately when I read your words: „Numbers are the most dangerous of all illusions“ - Søren Kierkegaard 😉
Thanks for sharing of your logic.