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.