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No one describes themselves as average at anything. We’re above-average drivers. Above-average parents. Above-average judges of character.
Statistically, that can’t be true—but it’s how we think.
Investing is no different. The average investor almost always believes they are above average. They read. They pay attention. They try to make smart decisions.
And yet, year after year, investors as a group earn returns that fall short of the market itself.
That raises a simple but uncomfortable question:
What’s the difference between earning the market’s average return and earning the return of the average investor?
Two Very Different “Averages”
When we talk about average in investing, we usually mean one of two things:
They sound similar. They are not.
The Market Average
The market average—think of the S&P 500—is “average” only in the sense that it owns everything:
When you look at long-term sector performance charts, the S&P 500 is never at the top and never at the bottom. Because it owns every sector, it must fall between the extremes. What looks like mediocrity is actually design. The index doesn’t chase leadership or flee weakness. It simply holds everything and lets time do the work.
The market average:
Its advantage doesn’t come from prediction or insight, but from limiting mistakes.
The Average Investor
The average investor, by contrast, is very human.
They:
Ironically, the average investor rarely earns the market’s average return. Not because they lack intelligence—but because they make predictable behavioral mistakes. The tragedy isn’t that investors get average returns. It’s that most don’t.
Sector Chasing in Action
Each year, a handful of sectors dominate performance. Technology one year. Energy the next. Financials after that.
The problem is simple:
Chasing sectors becomes a dog chasing its tail—busy, exhausting, and ultimately unproductive. The market average doesn’t chase. It waits.
Average Isn’t the Problem—Behavior Is
We’re taught that average means mediocre. In investing, the opposite is often true. The market’s average return reflects:
The average investor’s return reflects:
Market average limits mistakes. The average investor multiplies them.
The Real Advantage of Indexing
Index funds don’t succeed because they’re clever. They succeed because they’re behaviorally superior. They remove the need to predict, eliminate most bad decisions, and protect investors from themselves.
Indexing isn’t about settling for average. It’s about refusing to pretend you’re above average.
A Final Thought
Everyone wants to be an above-average investor.
Ironically, the most reliable way to get there has been to accept the market’s average—and stop trying to outsmart it.
So the real question isn’t whether you’re above average—it’s whether you’re willing to accept the humble dollar average.
I know how hard that is, because I’m an average investor too—and I still catch myself believing I’m above average more often than I should.
Excellent article William H. It took 20 years, but I proved that the S&P index over long periods was definitely better than my picks. Sure I had some better, but how long! and how many big losers, so 75% etc. Right now not even the Buffett stock BRK-b is keeping up with S&P. For the rest of my life, it is 85% S&P and 15% cash for those years to tide us over, that are in the Red. Amen.
Average may be insufficient. Yes, over very long periods of time the S&P provides good returns. Dividends have historically made up about 32% of S&P 500 returns. I understand those total returns have been about 10% per year.
However, for shorter periods of time, “average” may not be desireable. For example, from 2000-2009 “specific yearly figures show losses e.g., -9.10% in 2000, -36.55% in 2008…..Positive dividend contribution only slightly [mitigated] significant drops, resulting in a substantial overall decline for the decade despite eventual recovery by 2009’s end.” In 2009 the S&P 500 finally had a significant turn around of +25.94%.
This was important to me. At age 51 I had begun an unusual savings and investment campaign for my retirement. Yet, at the beginning of the “lost decade” I was debt free with a Net Worth of only $5,315.
At age 54 the “lost decade” began and continued until I was age 63.
Commencing at age 51, if I had performed per the very long term “averages”, i.e. 10% return per year, I never have been able to retire. In fact, had I tracked the performance of the S&P I would have experienced a very different outcome. Instead, by age 67 I was in phased retirement, owned a condo, had met my goals, accumulated 72% of my current peak. I was able to travel extensively, relocate, upgrade from the condo to a house, etc.
I was below average. At the age of 51 my retirement savings were a measly $848. I didn’t own a home, etc.
With an aggressive plan I turned that around. It required a lot of work, an unusual savings plan and a take-charge investment approach. This was coupled with a withdrawal plan.
For the next decade I worked the equivalent of two well-paying jobs. I funded a Roth, IRA and 401(k), purchased a condo for cash and funded the children’s college (out of state private universities – Cha- Ching!).
After a few years and having gained some knowledge, I became interested in better returns with improved risk. I began to pay attention to fund costs, averages and the S&P 500 and the DOW. I was interested in knowing what might be achieved. Prior to this, these indexes provided me with a broad brush indicator of how the market was doing. I didn’t treat them as a comparative tool. I don’t today. I also began running CAGR numbers. I was interested in determining the measure of my investment’s annual growth rate over time. I had goals and targets. Meeting them meant I would have the retirement funds I needed when the time came.
My portfolio grew and at one time I had 63 holdings. Today I have about 25, including sector funds, low-cost mutual funds, individual stocks and bonds with a few bond funds (TIPS, for example).
At FRA I took social security and invested my benefit.
As of 12/31/2025 the portfolios have a CAGR of 19.16% since 1995, which is as far back as my reliable data exists.
At the age of 67 I began a “phased retirement”, reducing my work hours and income year after year. In partial retirement, at age 67 I purchased a Class B RV and began travelling extensively.
At the age of 75 I ended my career and my writing side gig and became fully retired.
If you are more conservative in your investments than the market as a whole, yes, you will receive lower returns during boom years. But when the crash comes, your portfolio will go down less than the market as a whole, and will recover more quickly.
This is what retirees should be doing. While the market as a whole may provide splendid returns over the long term, your term is not so long any more. If you have managed to save a lot of money, you are looking to match inflation,or maybe a little more, and make it all the way to the end.
This year, I increased my assets by 10.5% while the S&P 500 returned 18%. Yes, I could have made more by investing in the tech-heavy S&P, but maybe, just maybe, the tech stocks are a powder-keg waiting to blow up. No one can know what will happen in the immediate future, and the immediate future is where retirees are living. The market may hit new highs in 2060, but I won’t be here.
I beat the S&P this year despite a 70/30 stock/bond mix. The key: international stocks.
My fortune cookie said: “Sometimes it can be riskier not to risk”
You should never have posted that! : )
“The riskiness of an investment is not measured by beta but rather by the probability — the reasoned probability — of that investment causing its owner a loss of purchasing-power over his contemplated holding period. Assets can fluctuate greatly in price and not be risky as long as they are reasonably certain to deliver increased purchasing power over their holding period. And a non-fluctuating asset can be laden with risk.”
– Warren Buffett in his 2011 Berkshire Hathaway shareholder letter.
Tomorrow I’m going to upload the first of three posts inspired this quote.
Never trust a fortune cookie – 😏
You won’t necessarily recover more quickly
That sounds like some good advice to me.
Your heading reminds me of the old Garrison Keillor line “all the children are above average” from his Lake Wobegon monologue. To have an average return for an investment portfolio over the last 20 years would be in some measures above average.
Paying attention to investment costs is key to market success. Broad market index funds or etfs typically have ultra low costs or no cost. Over time, these low costs versus average market costs make a huge difference to investors returns. This is a major reason why few mutual funds beat indexes over the long run.
“What’s the difference between earning the market’s average return and earning the return of the average investor?” This is not the question I ask myself. As a retiree I don’t hold 100% equity position (“the market”), but a 45/45/10 allocation. I know this may not match these funds allocations but I think they are appropriate proxies. The “average investor” is a conglomerate of people all with different goals.
My goal is to have a better 10 year return than Vanguard’s and Fidelity’s Target 2020 (the year we both retired) Funds.
The results:
Us 8.4%
Fidelity 6.99%
Vanguard 6.7%
Mission accomplished!
Addendum: Meanwhile the average US inflation rate during this time was 2.8%.
You did great!
This is a really good post. The “humble dollar average” more than likely is on the right side of the normal distribution as active funds are on the left.
S&P 500 vs. Active Funds (SPIVA)
The S&P500 doesn’t own “everything”: for that you would need a total market fund, or a total global fund. I do own the S&P500 index, for historical reasons, but I also own an Extended Market fund to balance it, plus an International fund.
I have no illusions that I am an above average investor, I don’t even have any interest in trying to be one – I once spent a few months as part of an “investment club”, and found the research extremely boring.
I practice benign neglect – rebalance once a year when I take my RMD, or if I happen to notice my asset allocation (50% stock) is off by 5% or more.
Oops did I write “Everything?” My bad…
🙂
I see that a lot, and it always bugs me.
Here’s the truth: in investing, “average” isn’t weak—it’s disciplined. The market’s “average” happens when you own the whole field and stop screwing with it. “Above average” is usually the story we tell ourselves right before we do something expensive—chase a hot sector, sell in fear, or try to time the comeback. Most people don’t lose to the market… they lose to themselves.
The market average is a collective truth, but it isn’t a personal one. While aiming for the index is the best strategy for the masses, I deliberately choose a ‘suboptimal’ return. I don’t need to pay the ‘risk tax’ required to achieve the average. When Risk vs. Utility is your true north, ‘below average’ can actually be the most rational destination.
Lost me… but I am sure you are correct. Cheers.
To get the market average, you have to accept the average “market risk” . If you choose a “suboptimal” below average return (say, 4% a year), because you don’t need the average return you’re also opting out of that volatility. I can overthink things lol
I just checked, our entire portfolio which includes significant percentages of cash and bonds returned just over one half the S& P 500 in the last 12 months.
As long as the balance is higher at the end of the year than at the beginning of the year, I’m happy.
I ran the numbers myself. Between my cash holdings and the estimated rate on my term annuity, my total portfolio is returning roughly 3.75% above inflation. I’m more than happy with that, especially since my long-term goal is simply to keep pace with inflation
But did you beat inflation?
The Prime Directive in Star Trek was not to mess with aliens in other worlds.
The Prime Directive in personal finance is to enjoy life as defined by the individual.
Captain Kirk failed on many occasions, Dr Quinn by his own admission hit it out of the park.
The S&P 500 adjusted for inflation is up almost 14% as of 26 Dec for the year.
Dr Quinn did half of that and he’s 7% richer in real terms with a very low-risk portfolio.