Normal is Relative
I hear the same thing from people every day, and in some cases even more than once a day. People love to say, “I’m going to wait until things get back to normal before _____.” Whether it’s in regards to investing, saving money, taking vacations, or whatever. Most people have a feeling that things are currently abnormal and therefore uncertain, so they think it’s a good idea to wait before taking whatever action they are considering.
What is normal? By the year 2000 it was normal to easily earn 25% or more a year on your investments. In the years following it was normal to lose 20%. A few years ago it was normal to earn 5% interest on savings accounts and CDs. 50 years ago it was normal to only buy a house when you could come up with a 20% down payment and get into a fixed rate mortgage. Decades ago it was normal to not even bother saving for retirement because you worked for the same employer your whole life and relied on a nice pension. Today it’s normal to have no pension at all and have to rely almost entirely on your own retirement savings.
Normal is relative. What’s normal today probably wasn’t normal 20 years ago. What was normal 20 years ago most likely doesn’t apply today.
Don’t Rely on Reverting Back to the Mean
We always hear about averages and virtually everything has an average. Inflation averages around 3%. Stocks average close to 10% annual returns over time. Unemployment may average around 4%. The list goes on, but I think you get the point. These averages which are so often thrown around are what most of us think of as normal. It makes sense — if something is plugging along at its average rate, that isn’t out of the ordinary, thus perceived as normal.
The problem is that averages can be very misleading — especially when looking at short-term trends. Most averages use large data sets that can cover many years or even decades. And when you have a few outlier years it can really skew the data. Look no further than the past 10-20 years of stock market performance. With the sharp increases in the late 90s and the steep declines of recent years your average return will vary significantly depending on what year you start and end on.
Also, consider the time it can take to get back to the average. If you’re using a 10% annual return as your “normal” for the stock market, how long do you wait for it to get back to that point before you’re comfortable investing in it again? What if stocks averaged 7% return for 5 years? That’s not your definition of average, but would you be happy to sit on the sidelines just because they are underperforming some arbitrary definition of normal?
Take Action Today
What’s happening today is normal. Just because it doesn’t mesh with what happened 20 years ago doesn’t mean you shouldn’t be doing anything. You should be living in the present and adjusting your expectations to mesh with the realities of today. Interest rates are below normal, so does that mean you shouldn’t put any money into a savings account until rates come back up? Stocks are volatile and we’ve seen sharp declines in the past few years but does that mean you should wait until the market can string together 3 consecutive years of double-digit returns? Of course not.
So stop waiting for things to return to normal, whatever your definition of normal is. For all we know it could take a decade or more before seeing so-called normal behavior. Or it’s entirely possible that we’re paving the way for a new kind of normal. Whatever the case, it doesn’t make any sense to sit around and wait for things to get back to normal. If you do, you’re letting precious time pass you buy. Instead, use this time to recalibrate your expectations, plans, and goals that work in today’s economic climate. You can always adjust your plans as time goes on, but at least you aren’t sitting around letting the world go by while you wait for something that may never return.
Author: Jeremy Vohwinkle
My name is Jeremy Vohwinkle, and I’ve spent a number of years working in the finance industry providing financial advice to regular investors and those participating in employer-sponsored retirement plans.
I was waiting for things to get 'normal' again to get back working on my home business. What got me motivated to stop waiting was losing my job :) So I either had to get my business going or get another job.
That sure is putting things into perspective. Normalcy as our parents and their parents knew it is something of the past, and relying on some outside institution to secure our retirement is definitely not on the cards any more. It is pretty much every man and women for themselves these days!
I've lived a life where frugality has always been the norm. It's been humorous and entertaining to watch frugality, saving, smart spending etc turn into a buzz universe! Normal, to me, has nothing to do with what is going on in the outside world and everything to do with personal spending and smart personal decisions.
Love this post!GREAT THINKING
Very nicely written. I hear this all the time - I've never came across someone actually writing about this. Because of this so call "normal state" - people often don't take chances - but normal is all relative. People should definitely take a proactive role in their lives and live in the "now" and not wait for the future.
I believe to stick to goal not believe to look forward in this world everything possible yes little bit luck required but if you work hard no one can stop to achieve goal.
Absolutely! I hear people saying this stuff at work all the time! It's really frustrating because in addition to what you've said here, people need to stop waiting for things to happen to them. They need to be PROACTIVE...not reactive. We have no guarantees that the economy will do other then what it is currently doing. Sure, we'd all love to see the economy improve and for unemployment to decrease, things like that, but as far as normalcy is concerned, I sincerely doubt there is such a thing in something that has the potential to be volatile. I think you hit the nail on the head when you said people need to adjust their expectations to meet the current state of affairs. It's time to be realistic and take the appropriate actions based on where you are today. Reanalyze your goals and determine the best course of action. Great post!
I seems as though we have been waiting for 2 years. You are right that it is time to move forward even with the economy still not growing.
I put off buying a home in California in the late 70s because prices didn't seem normal. But that "abnormality" continued on for another 30 years and got even more "abnormal" making a lot of money for people who ignored it. Indeed, waiting for "normal" by some criteria that you've chosen can be a very long wait. And even now California looks like it might implode. Is it "normal' now? Prices might be just as high relative to the state's reduced outlook.
Wait! This is nothing compared to what will hit us in about a decade when the US has to admit to the HUGE (try $93,000,000,000,000 - that's $93 TRILLION) unfunded liability for Social Security, Medicare and Medicaid. That is just $310,000 for every American alive today - including the children. Until the politicians are prepared to admit what is coming - we are living in a dream world right now
People definitely got used to the idea of ever increasing home values and endless credit as being normal. And as you and Rob have pointed out, what was normal then is not normal now. I know there are a lot of people who are in a bad position with today's normal especially because of job availability. But aside from that, there is a lot of good in the new normal. New opportunity for people who can afford it to buy homes at low prices. Opportunity for new businesses. And for once in a long time an increasing savings rate.
It is not as fun as continuous spending and ever increasing wealth. But once the shock wears off, the jobless rate declines, people will begin to forget this normal.
what about in the early 80's when a CD and Mortgage rates were at 17%!!!! 27 here, so this is what I've "heard" at least
I agree that it's a mistake to assume that there is some "normal" state for the market that things are going to return to without thinking things through.
However, I also think that the desire for normalcy is very healthy. We shouldn't try to quiet the voice inside us that want our money to be invested only in things that are "normal."
I believe that the trouble comes from a failure to define what constitutes "normal." There was nothing normal with the prices that applied from 1995 through 2008. Those prices were insanely high. It is actually today's priced that are normal. It's because we don't realize how strange things had gotten that we have come to believe that there was something odd in seeing a 50 percent price crash.
Once you understand that the crash was the most normal thing in the world, today's market is less scary than the market that was in effect in the days before the crash.