Exercise 3: Why One Decade's Return Isn't a Reliable Prediction — Possible Solution
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This chapter cites two real, different figures for the same underlying
stock market index: the S&P 500's own long-run historical average of
roughly 10% nominal annually, and its real, specific 14.8% average
return over the 2012-2021 decade. The gap between these two numbers is
itself the key evidence needed to answer this exercise.

WHAT THE GAP BETWEEN THE TWO FIGURES SHOWS
If a single decade's return reliably predicted the next decade's
return, there would be no meaningful reason for these two figures to
differ at all - the 2012-2021 period would simply match the long-run
average, and the long-run average itself would remain a stable,
unchanging number. Instead, the 2012-2021 decade ran nearly 5
percentage points above the long-run historical average, which is
direct, real evidence that individual decades regularly diverge from
the longer-term trend, sometimes substantially.

WHY A LONG-RUN AVERAGE WORKS THE WAY IT DOES
A long-run average like "10% nominal annually" is calculated by
combining many individual years and decades together - some
performing far above that average, others performing far below it,
including real historical periods with outright multi-year losses. The
long-run figure is a genuine mathematical average across all of that
real variation, not a description of what any single period typically
looks like on its own.

WHY THIS MATTERS FOR TREATING ONE DECADE AS A PREDICTION
Using a single strong decade's own return as an expectation for the
next decade risks two real, related mistakes: it ignores that market
returns move in cycles that have historically included both
above-average and below-average stretches, and it implicitly assumes
whatever conditions produced that particular decade's own strong
performance will simply repeat, which this chapter's own warn-box
already flags directly as an assumption the historical record does not
support.

WHY THIS TIES BACK TO CHAPTER 1
This is exactly the same caution Chapter 1's own warn-box raised about
its 7% assumed return - a real, commonly cited long-run average is
still an average, not a guarantee, and any specific period (a single
decade, or a single year) can and regularly does land well above or
below it.

ANSWER: The 14.8% figure for 2012-2021 shouldn't be treated as a
reliable prediction for the next decade because this chapter's own
long-run S&P 500 average of roughly 10% nominal is itself calculated
across many decades that varied substantially above and below that
average - the 2012-2021 period running nearly 5 points above the
long-run figure is direct evidence that any single decade can diverge
meaningfully from the longer-term trend. Treating one strong decade as
a forecast wrongly assumes the specific conditions behind that
decade's own performance will simply repeat, the same caution this
chapter's own warn-box and Chapter 1's own reasoning about its assumed
7% return both make explicitly.

WHY THIS WORKS AS AN ANSWER
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This uses the real gap between the chapter's own two cited figures as
direct evidence for the underlying point, explains why an average is
calculated across variation rather than describing any one period, and
connects the reasoning back to the same caution already established in
Chapter 1.