Average is Ideal

Do you want average returns? Or ideal returns?

Aristotle from “The School of Athens.” Source: Wikipedia

Lots of us look for perfection in what we do. We want the ideal job, the perfect car, the right schools for our kids. And there’s nothing wrong with trying to be the best we can be, for striving for excellence. When I compete athletically, I time myself to see how I’m doing against my personal best.

But there can be too much of a good thing. Coffee is good, but if you drink too much, you’ll get hyper. Exercise is an important part of a healthy lifestyle, but serious athletes often struggle with injuries that come from over-training. The ancient Greeks had an Oracle at Delphi that leaders would consult. Its temple had the phrase, “Nothing in excess” inscribed. Aristotle elaborated on this principle in his Ethics: all virtues were a middle ground between two extremes. Courage is desirable; a deficiency would be cowardice; its excess is recklessness.

The ancient story of Icarus and Daedalus illustrates the point. Daedalus was an inventor who was imprisoned on an island by the king of Crete. He fashioned wings out of feathers and wax for himself and his son Icarus, and the two of them flew off the island to escape. Daedalus warned his son not to fly too high or too low, lest the sun melt the wax on wings, or the sea foam get into the feathers. Either extreme would cause a disaster. But the youth didn’t listen to his father, and flew too close to the sun. The result was tragic.

Gowy, “The Flight of Icarus.” Source: Wikimedia

The same thing can happen with investing. We look back and see ideal returns, the “obvious” choices that would lead to the wealth of Croesus. But it’s never obvious at the time. We don’t know the future. Securities aren’t like mathematical formulas for conic sections, with an ideal, analytic expression for every permutation.

Formula for an ellipse. Source: Wikimedia

The most investment portfolio is a moderate one, with diversified assets spread across asset classes, industries, sectors, and security types. That way, if earnings issues hit the equity market, your bonds and property should hold up. If inflation depresses bond prices, cash and property returns should be okay.

A diversified portfolio won’t give you bragging rights at a cocktail party. But if you plan well, average returns should be enough. And when you think about it, enough is ideal.

Douglas R. Tengdin, CFA

By |2018-02-05T16:50:57+00:00February 5th, 2018|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

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