Asset Class Returns vs. “The Average Investor”

This chart tells us three things:

1) People are obviously doing something wrong very wrong with their investment dollars;
2) Attempts at generating Alpha end up costing most investors their Beta;
3) Irrationality, emotions, and cognitive errors are the underlying cause of this poor performance.


Source: ValueWalk

What's been said:

Discussions found on the web:
  1. b_thunder commented on Jan 20

    If “the average investor” underperforms the performance of most asset classes, then who grabs all the “outperformance?”
    Are they the proverbial “1%” – Soros, Tepper, etc?
    Or are they the fee-grabbing “industry?”
    Or are they the entities that prefer to remain “in the shadows?” (Mitt Romney’s $200m IRA comes to mind)

    • VennData commented on Jan 20

      According to this the “Financials” are 16-plus percent of the market cap of US equities. What sort of cash flow do you need to keep that level of asset price “going?”

      Do we really need that much dead wood to intermediate savers and investors with borrowers and capital spenders?

      On the other hand endowments, pensions, private pools of capital also suffer from hangers on, charging fat fees for their prognostications. Plenty of them who said inflation was imminent, said the stock market would tank after ’09, said it would rise in ’08, said Obama would destroy the dollar, and Bush would save the dollar, that tax cuts for the rich pay for themselves (Reagan and Bush) and Obama’s tax hikes would wreck the economy still are employed.

      That 0-8 would get most NFL head coaches fired. And you, rock-ribber GOPer, still listen to them.

    • rd commented on Jan 20

      I have figured for quite a while that this cycle won’t be finished until the financials are less than 10% for an extended period of time (measured in years, not months).

    • enuff commented on Jan 21

      If the purpose of the mutual fund industry is the “help” the average investor save then they as an industry they have failed miserably.
      However insurance industry (part of financial) serves an important function by intermediating risk.

    • pm2416 commented on Jan 21

      Time-weighted returns for the asset classes versus dollar-weighted returns for our “average investor”

      This is merely the 1473rd iteration of that theme: investors buy high and sell low, and they do it with great confidence and zeal.

  2. clay commented on Jan 20

    “The principles of successful stock speculation are based on the supposition that people will continue in the future to make the mistakes they have made in the past.” Thomas Woodlock as quoted in Reminiscences of a S.O. Almost a hundred years ago.

  3. DrSandman commented on Jan 20

    But my benchmark was Japan.

  4. rd commented on Jan 20

    You don’t have investment expenses listed in item 3. Unless people have been investing at Vanguard for the past 20 years, it is likely their average annual fees have been 1% or more. Comparing a retail investor at one of the large financial firms (with a couple of notable exceptions) to indices with no fees is not a fair fight. Very few 401ks or IRAs have been available for the full 20 years with no expenses.

    Recalculate the index returns subtracting the compounding of 1% annual expenses over the past 20 years and the graph would be much tighter. Behavior is a major player, but never underestimate the corrosive combined impact of high fees and bad investment advice from the financial firms.

  5. joshmaher commented on Jan 20

    What’s interesting there is that “average investor” is measured by mutual fund data – I’m not sure I agree that most mutual fund holders are trying to achieve alpha. Most wealth for the average investor is in a retirement account and that usually means mutual funds, so I can see that a large portion of retail investment is through those vehicles.

    Is it perhaps that mutual funds themselves are a broken vehicle?

    Another theory is that the average wealth advisor is making those calls and not the person who earned the money the first time around – those sales, exchanges, and such are a great source of fees for them.

    • rd commented on Jan 21

      I think mutual funds themselves are fine, similar to the concept of hedge funds playing a valuable role in the financial markets. Mutual funds are good vehicles for achieving diversification at relatively low cost. For long-term investors, it doesn’t matter that they are only liquid once a day and are only valued once a day. The intra-day illiquidity actually helps the small investor by eliminating the ability to make intra-day trades and theoretically can help them focus on holding times of years and decades.

      The problem is that exorbitant fees are often charged by both and many of the managers are not very good. The two combined with each other become a deadly combination for investors. Given that a high percentage of the wealth is held in 401k and 403b accounts where the employer picks the plan manager and the funds offered, there is only a limited “free market” component to the sale of these funds. The employers often have perverse incentives that do not necessarily align with the employees’ best interest. That appears to be changing as my 401k has been adding low-cost Vanguard index funds since about 2011. Before that it was almost impossible to find anything in my 401k with an expense ratio less than about 0.7%. Most of the active funds in my 401k today have expense ratios of 1% or more, but I have been able to carefully pick and choose and have a well-diversified portfolio with an expense ratio of less than 0.35% now. That was not remotely possible 5 years ago.

      There is a behavioral component to the low performance. However, I would estimate that there is a systematic drain on the average investors’ returns each year due to fees and poor manager performance that is, at minimum, 1%, and is probably closer to 2% to 3%, especially during the first decade or so of that 20 year period.

  6. cowboyinthejungle commented on Jan 21

    I don’t know BR, I think that the chart tells us the first thing only, assuming that this “average investor” is a reasonable approximation of a typical investor, rather than a mathematical construct. The other 2 things are your suppositions as to why #1 is true. The other 2 statements, I think most readers here would agree, are generally true, but no more of an explanation for this chart than why the “average person” makes any decision or set of decisions in life.

  7. Livermore Shimervore commented on Jan 21

    Hedge funds?? These have performed (more or less) for investors as well as the S&P and Russell? Or is this part of the 95% of total returns that stay in the hedge funds’ pockets (according to a previous study I can’t remember at the moment).

  8. SecondLook commented on Jan 22

    Half of American adults have some investment in stocks, but less than 14% own individual stocks; the rest obviously must be invested in equities through various funds. And of that small minority that do own stocks, a considerable number are only holding stock in companies they work for (often due to firms offering that option in 401K plans).

    The reality is that your individual investor who buys and sell stocks is just a small subset of the population. So, ignore the issue of stock picking skills, what the graph above is talking about is how poorly investors handle asset allocation – the macro-movement of their capital through various mutual funds.

    Which shouldn’t be at all surprising. People aren’t terribly bright about money. They never really have been. Sort of the fundamental basis to the field of behavioral economics, and an essential godsend for consumption capitalism.

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