Mean Aversion

The S&P 500 index has returned about 10% a year on average over the 65 years since it assumed its present form in 1957, but its annual return has been between 8% and 12% just six times during this period. Just 6 times in 65 years!

With stock prices often influenced more so by investor psychology, herd mentality, and market momentum, rather than their actual underlying fundamentals, attempting to time the market can be loaded with risk driven by a cycle of overextension and overcorrection-induced volatility.

If you're thinking of jumping into the stock market, or increasing your investment(s) given recent market volatility, consider and to minimize your risk and to maximize your long-term returns.

Millions of Americans across multiple generations have been taught by a prominent personal finance guru to avoid mortgages longer than 15 years, and if at all possible, to pay cash when purchasing a home. ⚠️

With interest rates hovering at historical lows for over a decade, and more recently, rapid real estate price increases and spikes in inflation, we don’t believe such a one-size-fits all approach is appropriate. And frankly, it slams the door on home ownership for many people. ⛔️

While it’s a commonly held belief that real estate often represents an attractive investment and therefore is a good way to build long-term wealth, the largest financial benefit to homeownership may be both its value as a hedge against INFLATION, and even its ability to enable you to BENEFIT from it. 💸

In the US, the long-term average annual appreciation rate for residential real estate is between 3.5 to 4%. And the average annual inflation rate? In that same range, about 3.8% since 1960. That means that the value of your home and the equity within it grows at the same pace as inflation. Because of this, your ownership and your home’s appreciation creates a hedge against inflation, ensuring that the dollars you have invested and will continue to invest in your home don’t lose value over time to said inflation. 📈

But there’s a second component to home ownership that actually allows you to BENEFIT from INFLATION. Given mortgages are “secured” by an asset which is your home, it’s one of the few opportunities individuals have to take advantage of long-term loans at relatively low interest rates, sort of like large companies do regularly when they borrow to finance business operations. 🤔

Consider a 30-year fixed rate mortgage that’s $1,250 per month. That’s about what you’d pay in principal and interest on a $275K home with a 20% down payment. That payment is $15K per year, or 25% of a $60K family income. However, after just 5 years of average annual inflation, those same payments would be 21% of the family’s income. In ten years it’s down to about 17%, by year 20 payments are only 12% of income, and finally by year 30 less than 9%. And this assumes that average income increases over time only happen because of inflation, not promotions, merit increases, or job changes. 😳

When considering inflation and “real” costs, fixed rate mortgages actually aren’t fixed at all, their cost declines over time. That means that a long-term fixed rate mortgage allows you to BENEFIT from INFLATION, as you’re able to lock in the price of your home today and pay for it with more valuable dollars in the future. 😎

Contrast this with buying a home outright, or higher monthly payments associated with a 15 year mortgage and the opportunity costs associated with the additional cash requirements are meaningful. Or compare renting, where annual costs are virtually guaranteed to increase due to inflation. 😲

At Mean Aversion, we’re teaching students how to think, not what to think, when it comes to personal finance, allowing individuals and families to make better financial decisions for their own unique situation, rather than relying on a cookie-cutter approach. 🚀

Follow us for more insights on personal finance topics, and please share our page for your homeschooling family and friends, as well as those that work in education! 🗣

Personal Finance Curriculum with a Twist Mean Aversion is aimed enabling and empowering both students in the classroom, and all people along their journey as life-long learners, by teaching them how to think rather than what to think about personal finance.

Time in the market, rather than timing the market.

Such a subtle difference on the surface but dig a bit deeper and the results are incredible. 😳

Take a look at the below data that CAPTRUST compiled, highlighting the variances in annualized stock market returns from 1987-2021 (34 years) if you missed the “best days in the market”.

For those that stayed invested for the entire 34 years, the average annual return was 11.8%, however, those investors that missed out on just the top 50 days of those 34 years experienced average annual returns of only 3.8%!

Volatility is often considered a measure of risk, but the real risk for investors is missing out on upswings in the market as a result of trying to time them.

If you're considering jumping into the stock market, or increasing your investments given recent declines, consider and to maximize your long-term returns.

Mean Aversion Partnering with founders who need financial support across their entire business lifecycle.

About 80% of all actively managed U.S. equity mutual funds underperformed their benchmark in 2021, while around 85% of U.S. large-cap equity funds underperformed the S&P 500.

Absurd right?

Oh, we almost forgot, for large-cap growth funds, 99% actually performed worse than their benchmark last year.

How is it that at least 4 out of every 5 of these professional investors, and for large cap growth equity funds, 99 out of every 100, missed their targets?

Investing in the stock market is one of the few opportunities individuals have where doing nothing can on average, yield above average results. Say what?

“Nothing” here means investing over time in market-based index funds, like those that track the S&P 500, rather than trading in and out of individual stocks.

See, for those professional investors whose job it is to actively manage their funds, in an attempt to outperform the indices which are their benchmarks, they must take risk. And the risk taken that allowed broadly 1 out of every 5, and for the growth equity funds, 1 out of 100, to outperform their index, is the same risk that caused all of the others to underperform it.

With extreme volatility and the resulting battered prices across the stock market as of late, and results like the above having played out time and time again over the course of the market’s history, investor discipline is as important now as ever.

And with tactics like dollar cost averaging and diversification through index funds proven to be the best path to long-term prosperity, by leveraging these approaches you'll be well on your way to outperforming many of those professional investors!