Average vs. Humble Average

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:

• The market average
• The average investor

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:

• Every sector
• Every style
• Every winner and every loser

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:

• Never chases performance
• Never panics
• Never second-guesses itself
• Rebalances automatically

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:

• Chase recent winners
• Sell laggards just before recoveries
• Trade too often
• React to headlines
• Confuse activity with progress

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:

• You only know the winners after the fact
• By the time leadership is obvious, prices already reflect it
• Leadership rotates faster than investor conviction

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:

• Broad ownership
• Discipline
• Patience
• Humility

The average investor’s return reflects:

• Overconfidence
• Timing errors
• Emotional reactions

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.