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Never Cross a Stream That Averages Four Feet Deep

Can’t recall who said this (sounds like something Mark Twain might have said) and it makes me laugh every time I think about it. From a retirement planning standpoint, the idea is that no one ever gets average investment returns in their portfolio. If your target is 5% (a reasonable estimate for a moderate portfolio over a long time period), some years you will earn 8%, some years, it will be 2% and still others will be -3%. It’s the accumulated return over the long term that may equal 5%.

Accordingly, you have to be ready to sit through years of under-performance in exchange for years when the return is above the target. I don’t have this information officially, but it seems to me that in any five year period, two years will be below the target, two years will be slightly below and slightly above the target and one year will be very good.

Your withdrawal strategy in retirement needs to take this into account as well. That is, if you assume a 5% return on your portfolio, you may take a little more out in the good years as long as you are willing to take a little less out in the poor years.

The point is: averages are just an amalgamation of all the years added together and divided by the number of years in the list. Common sense says there will be years above and below the final average and few years right on the number.