Averages are easily understood and make for good headlines. But how often do we truly experience “the average”?
Inflation in the UK has averaged about 5% for the last year. However, the inflation you have experienced could be quite different from this figure.
The cost of petrol is up around 20% over the last year, and food is up too but by less than 5%. Whereas rent and mortgage payments (THE major household cost?) have hardly changed at all.
Depending on your lifestyle your personal inflation rate is different from the headline rate.
Another example is investment returns.
For the last 10 years total stock market returns have been above the long-term average. But, since 2000, significantly below.
Does that make them over- or under-valued? Depending on the axe you have to grind the averages will support your story.
Not that it matters. Your average rate of return probably does not match either figure.
You will have invested on a specific date, added and/or withdrawn money over time and there will have been various rebalances and other changes.
The market average bears no relevance to you. Your average is all that matters. As long as that more than covers costs and inflation things will work out well for you.
In financial planning we should be aware of decisions based on averages, they simply aren’t applicable.