Commentary by Joe Clark
Spring time is a favorite for many Hoosiers. The flowers, the birds, the hopeful barbecue and the anticipated round of golf all serve to remind us how special this time really is in our lives. It is also a season of great unpredictability as weather can change by more than 50 degrees in just a few days! The disruptions and distortions to expectations bring into play the challenge with averages.
Whether it be retirement planning, investment returns or even costs of certain events like weddings, looking at the average requires that we take in the highs and the lows and average them together to find a middle number. In some cases the average is very effective, but in other cases it can cause trouble.
New York City weather is a great example of how averages are a wee bit misleading if we are going on a family vacation. The average temperature in the Big Apple for the month of March is 32 degrees with a high of 42 degrees and around 4 inches of precipitation. That would suggest one might take a trench coat, sweater and an umbrella. The problem is, weather can be unpredictable. On a trip during my senior year in high school, we found the weather to be rather sunny and a crisp 85 degrees! Had we planned for the average, we would have been toasted in our sweaters and trench coats.
Averages or the mean can tell us a lot or at least give us a reasonable range on many things. When possible, you also want to know the median which provides the middle value in the list of occurrences. This is important when you see extreme differences to the high or the low or both. The average temperature in New York City doesn’t help when you are going on a family vacation in March of 1985! Packing properly means you know what’s happening now.
The same is true for retirement planning where volatility of returns and the tax you pay on the average dollar distributed are two critical components for success. Knowing the average and the median matter but knowing what’s happening currently is important as well.