Average Returns Are Awesome

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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!). 

Final Thoughts

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.

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21 Comments

  1. Ron Cameron

    I too am a big fan of the market average! Investor behavior studies are always very eye opening. Dalbar does one every year, and I always enjoy it.

    I remember reading that during Peter Lynch’s tenure running the Magellan Fund it made a killing, but the investors on average broke even. Yikes! All because they’d try to time things and buy when it was hot and elevated, and sell after it tanked.

    There are a small handful of funds that -do- beat the market over long periods of time, but waaay more often than not most funds fail to just reach the average. And average, again, is quite sweet.

  2. Great stuff!

    Carl Richards calls this the Behavior Gap… the difference between market returns and investor returns. Too many people try to be fancy and most wind up getting lower returns than if they’d just accepted “market returns” rather than trying to goose their portfolios.

    • Mr. Groovy

      Hey Brad, thanks for the comment. I take this idea further in my new post today. Check it out – I’m not such a genius. Great point about Carl Richards. I love his insights and listen to his podcast frequently.

  3. I just have to disagree with the premise. Though 8% may be a decent return, the premise is “why try harder, you’re bound to fail. You can’t excel so why try. You will only ever be average.” Why did I try hard and succeed so I could quit working at the age of 30? It’s almost impossible to do, so why try? Statistics agree with you, but I’d rather take my chances.

    Plus, who ever said the stock market is a good place for your money (those financial advisors who leach your wealth every year think it’s great). The value in a company is sucked up by ‘accredited investors’ and ‘friends and family’ or other insiders and then they cash out at the IPO. The suckers like us get in after the IPO and get the below average returns. Notice all the really wealthy people were in a business BEFORE it went public.

    Remember, Wall Street lobbies government, and government makes laws that benefit people locking away their money into those Wall Street firms, then penalizes you for taking it out. It’s all a giant racket to line their pockets.

    Instead, you can have great returns in personal lending, real estate investing, business loans, real estate lending and all sorts of crowdfunded solutions. 8-15% is really quite easy to achieve with very little effort, and I still think that’s below average. (my lowest real estate investment earns over 35% for 6 years in a row)…

    Rant Over. 🙂 thanks for reading.

    • Mr. Groovy

      Hey, Eric. Rants are always welcome here, my friend. You make a lot of excellent points. I would argue that trying harder to beat the market is like trying harder to become a faster runner. Yes, you can tighten your core and lose excess weight. But if you’ve gotten into good shape and can only run the 40-yard-dash in 5 seconds, there’s no way you can work your way down to a time of 4.3 seconds. Five seconds is your natural limit. For the typical investor, average returns are his natural limit. And he can only achieve these returns by doing the financial equivalent of tightening his core and losing excess weight; that is, by minimizing fees, making consistent contributions over years, and not panicking during a selloff. I am impressed by your recent real estate returns. I wonder, however, if regression to the mean will soon catch up with you. We’ll see. I tried real estate a while back and soon discovered that I lacked the fortitude to be a landlord. Managing tenants is freakin’ hard! I guess I’ll be hanging around your site more often. I’m curious to see how you do it. Thanks for stopping by, Eric. And feel free to rant in my comments section any time. I love it.

  4. Miss Jaime

    I could be the next Warren Buffet. Why not? 😉

    Yea I don’t think I’m a special snowflake. I want to be realistic about this. A lot of people who think they’re a special snowflake get hurt when real life hits like those people that lose thousands of dollars day trading.

    I think it’s awesome investing even exists in the first place. We’re lucky to be alive in a time such as this.

    • Mr. Groovy

      Hey, Jaime. When I was growing up IRAs and index funds were in their infancy. IRAs began in 1974 (when I was 13). Roth IRAs didn’t come around until 1997 (when I was 36). Also, when I was growing up, investing was something only rich people did. Middle-class people and working-class people didn’t have brokerage accounts. This was mostly because trading fees were fixed and they were very high. Now you can buy a million dollars worth of a mutual fund for $7.95. And if you buy one of your broker’s proprietary funds, the trading cost is usually zero. An American today can earn an 8 percent return on his investments with hardly any trading costs and hardly any effort. How does that compare to Americans just a couple of generations ago? How does that compare to Americans a century ago? How does that compare to the typical person growing up today in South America, Africa, or Asia? Like you said, Jaime, it is awesome that investing even exists. We are truly fortunate.

  5. Oooo! I love averages when it comes to money! 🙂 Give me a cut of the NBA salary! But I also agree with you. When we looked at the market returns, we made sure we cut out the best years and cut out the worst years… that skews things significantly! And I don’t think I’ll beat anyone out. Index funds are for smart people because, as I keep telling my kids “smart people are lazy”!

    • Mr. Groovy

      Hey, Maggie. Excellent point about discarding the extremes. Didn’t think about that. Would “median” returns, then, be a better indicator of how you or the market did? And I love your little pearl of wisdom, “smart people are lazy.” I’ll definitely have to remember that. Thanks for stopping by. It’s always a pleasure reading your thoughts.

    • Mr. Groovy

      Hey, Matt. Mrs. Groovy and I are invested in only one individual stock. And we know it’s a total gamble (Mrs. Groovy refers to it as our lottery ticket). We didn’t do any due diligence. We didn’t pore over its quarterly statements. We had a hunch. And we only threw an amount of money at this stock that we could afford to lose. The rest of our portfolio (approximately 98 percent), is invested in low-cost index funds and ETFs. Maintaining this portfolio takes a about four hours a year (a couple hours to take advantage of any tax-loss harvesting opportunities in December and a couple hours to re-balance in January). And you know what this no-effort portfolio has returned over the past nine years? A little over nine percent annually! Like you said, Matt, “I’ll take average returns in exchange for minimal effort all day.” Thanks for stopping by.

  6. All very well stated. Investing success is not too hard to find. It starts with starting … the earlier the better. Time, compound interest, low fees and average returns are an awesome combination.

    • Mr. Groovy

      Hey, James. I love your summation. “Time, compound interest, low fees and average returns are an awesome combination.” The only problem with this wisdom is that it’s BORING. And that’s what does in the average investor–especially the average guy investor. What bragging rights does a guy have at a cocktail party if his equity investments over the past 10-plus years consist of an S&P 500 index and a small cap index? Sure, he did very well. But that investing strategy is so pedestrian. And someone with the IQ of a doorknob can do it. But the guy at the cocktail party who made a killing on cattle futures or shorting Chipotle? He’s a rockstar. For too many investors, ego trumps common sense.

  7. When we started investing, I was thinking of beating the market too. Soon, learned to be patient. That really pays well. I am not physically capable like a professional athlete. So my income as well as the savings are accordingly low.

    • Mr. Groovy

      Hey, DA. I totally agree with you. To invest in individual stocks, you (talking generally here) gotta do your homework. And even then the odds of you beating the market are remote. It certainly isn’t very flattering to your ego, but you just have to admit to yourself that you’re not a genius and you have no hope of being the next Warren Buffett. And this ain’t so bad. Especially if you’re young and you’re a disciplined investor. Average returns, if given time, will make you wealthy. Mrs. Groovy and I were fortunate to come upon this realization fairly quick. Glad to see you’ve seen the light too. Thanks for stopping by DA. Hope to hear from you again.

  8. It’s amazing to think about how many people still try to time or beat the market despite all the evidence that it’s nearly impossible to do. Give me some average returns any day! (or better yet, an average pro athlete’s salary to invest!)

    • Mr. Groovy

      Hey, Gary. I hear you about a pro athlete’s salary. Man, if I just had the average NBA salary for a year! When Mrs. Groovy and I first started investing we tried our hand at stock picking and found out very quickly we were in over our heads. Now we have some money we can afford to lose invested in one stock. The rest of our money is in low-cost index funds and ETFs. We’re just gonna let the market do its magic. Sure, we’ll take some hits (dot.com bubble, 2008-2009). But ten years from now we’ll be in a better place. And with a lot fewer headaches along the way.

  9. Good article thanks. My trouble is to invest on a monthly basis in ETFs. Here in Malta, I don’t have access to some fancy Vanguard. So I’m constrained to leaving money idling in a savings account until I can buy an ETF. Of course, if I did this on a monthly basis, the fees would crush my returns. What do you suggest?

    Cheers
    MrRicket
    http://www.myricketyroad.com

    • Mr. Groovy

      Hey, Mr. R. Yeah, that’s a tough one. I would just shift to dollar-cost-averaging on a quarterly basis. You’ll still pay more fees than you or I would be comfortable with, but the hit won’t be as bad. Does your broker have any proprietary index funds that can be traded for free? I know Fidelity, for instance, doesn’t charge trading fees if you buy one of its funds. And thanks for reminding me that investing options in other parts of the world aren’t as good as what we have here in the states. That’s another reason Americans should be grateful for “average” returns. Thanks for stopping by Mr. R. Always great hearing from you.

    • Hey MrRicket. For you, like for expats like me, the solution is to find an international broker that accepts your business with minimal fees. You won’t find a “Vanguard”, but you should still find some reasonable company out there… I won’t name names.

      • Mr. Groovy

        Hey, Stockbeard. Thanks for lending a hand. I just took for granted that investing outside the U.S. was no more formidable than investing inside the U.S. You and MrRicket helped me see otherwise, though. I’ve always said I’ve won the lottery just by being born in America. The ability to invest cheaply and easily is but another resounding confirmation of that adage.