What is Average?
At lunch a few weeks ago, a friend said he didn't want his son to be average. His comment struck me because all his kids do well in school and are exceptional athletes. I then spent 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 Marie-Josee Ta Lou? She is an Olympic sprinter from the Ivory Coast who finished 4th in the women's 100-meter dash at the 2020 Olympics. Her time was 10.91 seconds – the average winning time of the eight runners in the race. By Olympic standards, she's average. However, if she raced anybody else, she'd win. Is Ms. Ta Lou average?
The average score at the 2023 Masters was 286. Justin Rose finished 16th with a score of 286. Is Mr. Rose an average golfer? Do you think he'd win if he were in your foursome? 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? Doubtful.
Average is relative.
Some investors shun index funds because they generate market or average returns. Who wants average returns? If you could capture these returns, your account balance would grow substantially. Yet, most investors fail to do so and, as a result, produce below-average results.
The S&P 500 has averaged a 9.59% annual return for the past twenty years, turning $100,000 into $625,220. I know investors want to outperform the S&P 500, but most don't. However, they can benefit from market returns. The S&P 500 soared 26.32% last year.
According to a 2022 Dalbar study, investors underperformed the S&P 500 by a wide margin. At the time of their report, the index was down 18.11%; the individual investor lost 21.17%, a difference of 3.06%. According to Morningstar's Mind the Gap report, investors underperformed mutual and exchange-traded funds by 1.7% annually for the past ten years.
Why do individual investors constantly underperform the market? Here are a few reasons.
Emotions. Investors fall prey to greed and fear, buying high and selling low. When stocks rise, investors feel good and buy more stocks. When stocks fall, investors panic and sell their holdings. The best time to buy is when everybody else is selling and sell when others are buying.
No Plan. Investors without a financial plan are likely to react to headline news. Without a plan, it's challenging for investors to have financial success.
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.
Noise. TV shows, newspaper headlines, and social media posts will try to scare you out of your portfolio. Distracted investors make mistakes, so focus on your goals and tune out the noise.
Lack of accountability. A trusted advisor can help you navigate your finances, and a Certified Financial Planner™ can design a plan and portfolio for you and your family.
Buy-and-hold investors can capture average market returns if they dare to stay the course. Focusing on your goals and following your plan will pay substantial dividends. Average returns can deliver above-average wealth.
Invest for the long haul. Don't get too greedy, and don't get too scared. ~ Shelby M.C. Davis
January 19, 2024
Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management 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 so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level.
Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren't suitable for every investor. Prices and yields are for today only and are subject to change without notice. Past performance is not a guarantee of future performance.