If I told you I worked in the fast food industry and I made the average salary, you would likely pity me. And for good reason. The average full-time fast food worker makes between 15k and 19.5k annually. Not exactly living la vida loca money.
But suppose I made an average salary and was employed, not by McDonald’s, but by the New York Knicks. Would you pity me then? Probably not. You might not know the exact salary figures for the NBA, but you’re surely aware that anyone who suits up for the NBA is a one-percenter.
According to Forbes, the average salary of an NBA player is now nearly $5 million. For a baseball player? The average MLB salary is $3.82 million. NHL? $2.58 million. And NFL players? They’re the pikers of the group. The average salary in the NFL is $2 million.
Average, then, at least when it comes to salaries, is all about context. Sometimes average sucks (fast-food worker’s salary); sometimes it’s okay (cop’s salary); sometimes it’s excellent (doctor’s salary); and sometimes it’s awesome (NBA player’s salary).
The concept of average and context got me thinking about investing. Many investors frown upon average returns. Average returns are for losers. No, financial snobs can’t tolerate average returns, they need to beat the market. To beat the market, in turn, financial snobs have a number of strategies. Here are three of their favorites.
- They time the market—that is, they leave the market when it’s about to crater and re-enter when it’s about to begin a record-shattering bull run.
- They pay homage to last year’s winners. After all, everyone knows that last year’s top-performing mutual funds or asset classes will invariably be this year’s. Why then let your money languish with proven losers? Financial snobs know their money belongs with the hot hand.
- They buy individual stocks. And why not? Anyone who’s smart enough to become a doctor or lawyer is smart enough to unearth the next Google. What’s so hard? Watch CNBC. See what Bloomberg analysts are saying. Buy some trading software. You’re all set.
The only problem with these strategies, however, is that they don’t work.
According to one analysis of investor behavior during a twenty-year period (January 1, 1995 to December 31, 2014), the typical equity fund investor had an average annual return of 5.19 percent. The S&P 500 had an average annual return during that period of 9.85 percent. And on the bond side of things, it was even worse. The typical fixed-income investor had a 0.80 percent return. The Barclays Aggregate Bond Index had a 6.20 percent return.
Remember what the market is. On the surface, it’s millions of investors voting on which companies will be the most profitable going forward. Those who think a particular company’s prospects are good, buy its stock (or buy more of its stock if they’re already investors). Those who own stocks in a company they think has seen better days, sell. It’s as simple as that. On a deeper level, though, the market is a relentless value bot. It will eventually, despite all its shortcomings, identify the champions—those companies with excellent management, outstanding products, and real profits—and expose the frauds (Enron, WorldCom, Pets.com, etc.).
Investors can and do beat the market from time to time. But this is mostly done over the short haul (a year or two). Over the long haul (10 plus years), very few investors beat the market. And those who do are more likely to be the benefactors of survivorship bias rather than investing skill. So why even try to beat the market? Are average returns so bad? Financial snobs assume they are. But is this the case?
The average annual return of a balanced portfolio (60 percent stocks, 40 percent bonds) over the long haul (30 plus years) is around 8 percent. To get this return, you only need to set up an IRA or a brokerage account with a discount broker (Vanguard, Fidelity, Schwab, etc.); pick an S&P 500 index and a total bond market index for your 60/40 portfolio; and then automate your monthly contributions. Oh, and you also need to do nothing over the next 20-30 years except rebalance your portfolio once a year. So let me put this vanilla approach to investing into perspective. Small investing fees, little effort, a strong likelihood you’ll double your portfolio every 10 years, and you’ll do better than the typical financial snob poring over market fundamentals and binge-watching Mad Money—now, I’m just an honorary Southerner who thinks refined living is a tailgate party with copious amounts of fried chicken and ice-cold PBRs, but this strikes me as a pretty awesome deal. And average market returns strike me as anything but ordinary (double the size of your portfolio every 10 years!).
Don’t be a financial snob. Stick with average returns. They’re awesome. If you want to turbocharge your wealth-building, elevate your skills so you can get a better job and have more money to invest. And forget about trying to beat the market. You’re not the next Warren Buffett.