What If Your Kids are Average?

As parents, we all know that our kids are above average. Since we live in a post-fact world, that can be believable if not empirically true. Society urges us to be better than average from the first time we color outside the lines or get a homework grade. We learn to look down our noses at “average.” But what if average could be amazing?

This is still a personal finance blog, so of course we’re talking about investment return averages, not school grades or other measures of performance.

The long-term average of the S&P 500 index, the largest 500 US companies, is 10.13% since 1957.

While the S&P 500 index is not the entire US stock market, it is:

• The index we often hear about in financial headlines.
• A reasonable proxy for the direction of the US stock market.
• A diversified index to consider investing in for exposure to US large companies.
• Definitely not representative of assets like bonds, real estate, precious metals, commodities or digital vapor.
• An index that many investors are very heavily invested in (e.g., TSP C-Fund, VOO, SPY, etc.)

When we think about average returns for investments, there can be a yawning gap between a particular investment’s average return and a particular investor’s average return.  If an index fund returns 10% over the past 30 years, that 10% assumes that all dividends, stock splits, capital gain distributions, index composition changes, etc. were all experienced by the investor in order to get the 10% from that investment over the 30-year period.

Investors may not see that same return for many reasons. We jump in and out of the investment when we’re in a greed-fear cycle. We dollar-cost-average as we buy shares. We pull money out for our goals.  Our dollars aren’t along for the same ride as the dollars that create that advertised 10%.

Some of us are coded to loath anything average. “It just feels wrong.” “Average is for those who settle!” Thus, we try to beat an average by taking more risk. We try to pick the winners, dodge the losers, and get the timing right with each buy and sell. Most often, we fall below the average by trying to beat the average, because on average… we can’t beat the average.

Research continues to bear out that 80% of active money managers fail to beat their market index benchmarks.  These are professionals with training, expertise, mentors, the right tools (for a job that apparently can’t be done) and the full time job of beating the average. What hope is there for us to beat the average?

Perhaps we’re thinking about this wrong. We shouldn’t try to beat the market average or an index’s average. We should try to beat the average investor’s average… by just getting the market’s (or index’s) average!

If the S&P 500 index average is about 10% for the past 60 years continued, then $583 per month (today’s IRA monthly contribution) invested every month for the next 30 years would result in over $1.3 million dollars.

But if we get the average investor’s average return is only 5-6%, we only end up with about $586K dollars (assuming the high end 6%).   Our best path to this below-the-right-average average is to do what average investors do: try to time the market, chase fads, take excess risk to beat an average, and ultimately face-palm at the results.

Cleared to Rejoin

When it comes to investing, it would be amazing if our kids were average in their returns. More specifically, if they sought the index’s average by not acting like the average investor.  Trying to pick the winners, dodge the losers, and get the timing right at the buy and sell can be a great way to underperform stock market averages.

Fight’s On!

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