What is Average?
At lunch a few weeks ago, a friend of mine said he didn’t want his son to be average. I was struck by his comment because all his kids do well in school and they’re exceptional athletes. I then spent some time pondering the word – average. What is average? According to Merriam-Webster it means a single value that summarizes or represents the general significance of a set of unequal values. It also states a level, typical of a group, class, or series.
Do you know Akani Simbine? He is an Olympic sprinter from South Africa who finished 5th in the men’s 100-meter dash at the 2016 Olympics. His time was 9.94 seconds – the average winning time of the eight runners in the race. By Olympic standards, he’s an average sprinter. However, if he raced anybody else in the world, he’d win – by a lot. Is Mr. Simbine average?
The average score for the top 20 finishers at the 2018 Masters was 281. Tony Finau finished 10th with a score of 281. Is Mr. Finau an average golfer? If he was in your foursome at your local muni course, do you think he’d win? I do.
The average height of an NBA player is 6 foot 7. Russell Westbrook is only 6 foot 3. He has below average height, but if he showed up at your local YMCA to play basketball, he’d dominate the court. Would you be able to guard Mr. Westbrook one on one? Doubtful.
Average is relative. Metrics and benchmarks matter.
Some investors shun index funds because they’re designed to generate market returns, or average returns. Who wants average returns? If you were able to capture these returns, your account balance would grow substantially. Yet, most investors fail to do so and, as a result, produce below average returns.
According to a 2017 Dalbar study, investors underperformed the S&P 500 by a wide margin. The S&P 500 is an unmanaged index of stocks. At the time of their report the index returned 11.96%, the individual investor made 7.26%, a difference of 4.7%. The 20-year annualized return for the index was 7.68%, the individual made 4.79%.
The dollar differential is staggering. A $100,000 investment for twenty years earning 7.68% will grow to $439,239. If the rate drops to 4.79%, the balance falls to $254,915, a difference of 42%.
Why do individual investors constantly underperform the market? Here are a few reasons.
Emotions. Investors fall prey to greed and fear. They buy high and sell low. When stocks rise, investors feel good and they buy more stocks. When stocks fall, investors panic and they sell their holdings. The best time to buy is when everybody else is selling.
No Plan. Investors without a financial plan are likely to react to negative news. They don’t have a game plan. Without a plan, it will be a challenge for investors to have much financial success. An archer needs a target.
Short-term thinking. Markets fluctuate, and no trend lasts forever. Focusing on recent, short-term market moves may cause investors to lose sight of their long-term goals. Marathon runners don’t panic at the five-mile mark.
Noise. TV shows, newspaper headlines, Facebook posts, and tweets will try to knock you off your target. Distracted investors make mistakes. Focus on your goals and tune out the noise.
Lack of accountability. A trusted advisor can help you navigate troubled waters. A Certified Financial Planner™ can design a plan and portfolio fit for you and your family.
Buy and hold investors can capture average market returns if they have the courage to stay the course. Focusing on your goals and following your plan will pay substantial dividends. Average returns may deliver above average wealth.
I feel like a fugitive from the law of averages. ~ William H. Mauldin
December 10, 2018
Bill Parrott is the President and CEO of Parrott Wealth Management firm located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process to help our clients pursue a life of purpose.
Note: Investments are not guaranteed and do involve risk. Your returns may differ than those posted in this blog.