Half Dome Is Anything but Average
Behavioral Finance | Blog | Economy | Planning Perspectives | Portfolio Management
What we remember
A few weeks ago, I had the chance to hike Half Dome in Yosemite National Park for the second time in my life. The first time was over 23 years ago with two close friends. The three of us reunited, added one more long-time friend, and ventured out again to conquer the 8,800 granite peak, climbing 4,800 feet of elevation to reach the top. It was a one day, 16 mile round trip trek, that left us utterly exhausted and simultaneously exhilarated by day’s end.
My memories of the journey 20+ years ago were few but poignant. I remember the heat, starting late, and not having enough water. I remember the cables and 2×4’s on the smooth granite face as you climb the final 400 feet to the top. I remember the sense of accomplishment we had in climbing this beautiful peak. Lastly, I remember that grueling journey back to camp in the dark (see the first memory).
But the trip involved so much more that I either conveniently forgot or blocked out. The fresh memories from our latest trip included breathtaking vistas, punishing rock steps going straight up the sides of waterfalls and a non-stop climb just to get to the sub-dome. All of which made you question your sanity as you struggled to keep going. To top it off 🙂 after accomplishing our goal of summiting, we still had the familiar daunting challenge of hiking back down, 8 miles to camp.
In the end, the destination was what we were in it for, but what we had to go through to get there was very difficult. So, what does this have to do with investing? Well, in reality, the challenges of our Half Dome adventure were metaphorically speaking very similar to our experiences as investors as we experience the arduous journey of tough markets in order for us to achieve our long-term investment goals.
Average is anything but average
As investors, we’ve all heard the phrase “average returns”. This phrase encompasses periods of time where the stock market’s performance is averaged out to an annual number. We generally understand that in any given year, the market can be up or down, but over time the market settles on an “average return” number that has historically been a worthy goal for investors. However, in any given year, average returns are anything but average.
The 8 mile one way trek to the top of Half Dome climbs 4,800 feet of elevation. This works out to an “average” climb of 600 feet per mile. If you spend time in the mountains, hiking, trekking, or trail running you know this is a reasonable number (not easy, but not unbearable either). But, much like investing, your gains are not achieved at an even pace. There are sections of the hike where the path is flat and windy, barely climbing at all. There are sections, where you drop elevation before gradually ascending again. There are moments where you feel like you could literally fall off a cliff. And inevitably there will be sections that are so steep you can’t believe you are making the climb.
When thinking about our long-term goals and the average returns required to get us there, it’s easy to forget that the journey can be hard if not downright stressful. Why? Because we anchor to those average return numbers during planning conversations. We might not imagine it to be hard to get “average returns”. The term “average” itself evokes thoughts of a boring and uninteresting experience. The reality is much different.
Questioning your sanity
As a recent example, if you look at the last 3 years investing in the S&P 500 (at the time of this writing) the average annual return was 9.2%. Not bad, right? Who wouldn’t be fine with an average equity return at 9.2% over those 3 years? But, look closer and it’s a different journey.
In year one, we experienced a gain of approximately 32% for the S&P 500. Followed by a tough year where the market declined by approximately -15%. In the third year (last 12 months), we began making up ground again realizing a gain of almost 15%. When looking at the sequence it’s clear there is no “average” return in any given year. It’s relatively chaotic.
To expand on this example, our team member Jonny Jonson gathered information from a NYU Stern School of Business study highlighting the returns of the S&P 500 from 1928 to 2022. Below are some of the statistics:
- Average Return from 1928-2022 is 11.51%
- Truly “average” returns (8-12%) happen 4% of the time, or 1 out of 24 years
- “Scary” markets (-10% or more) happen 13% of the time, or roughly 1 out of 8 years
- “Exciting” markets (+10% or more) 57% of the time, or almost 6 out of every 10 years
- The S&P 500 is positive 72% of the time, or roughly 3 out of every 4 years
As you can see, average is anything but average:
With the benefit of hindsight it is easy to say over the last few years “of course, I’m fine losing -15% in one year, if I’m going to average 9.2% over the same period!”. However, in the moment, that -15% loss hurts. It’s hard. It makes investors question their sanity. It doesn’t feel average, it feels scary and uncertain and unfortunately comes with a heavy dose of “what if I lose more money?!”
Your experience on your investment journey is very different then the final destination. But, once you get past the leg burning, lungs wheezing, and general feeling of anxiety associated with the difficult trek, you arrive at a place that makes it all worthwhile. You reach your goal and you conveniently begin to forget what it took to get you there.
(Doug, Austin, Paul and Joe on top of sub-dome before summiting Half Dome – Sept. 2023)
(Joe, Austin, Paul and Doug on top of Half Dome above the Yosemite Valley – Sept. 2023)
(Paul, Joe and Doug on top of Half Dome – July 1999)