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Average is OK in Stocks

By Terry Savage on October 06, 2021

Few people want to be average. It may be a distinctly American character trait that we want to be outstanding, special, “above average.” Garrison Keillor made a fortune on this hypothesis, writing about the fictional Lake Wobegon, “where all the women are strong, all the men are good-looking, and all the children are above average.”

And the preference for being “above-average” permeates the stock market. Millions of people watch pundits on CNBC talking about how their stock picks “beat” the market. A new generation of Robinhood customers is focused on “beating” the professionals, picking out-of-favor stocks and using their buying power to push the shares to new highs.

So here’s a heretical thought in today’s markets: Why waste your energy trying to beat the market, when you can easily “be” the market, just by purchasing an index fund, and getting long term results that have historically beat inflation for every 20-year period?

According to Morningstar’s Ibbotson research division, the average annual return for the S&P 500 stock index (with dividends reinvested) is 10.1%. In fact, in recent years, the S&P Index has frequently exceeded its long-term average performance. According to S&P Dow Jones Global, which owns and tracks the index, the S&P 500 posted a 40.8% gain over the 12 months ending on June 30, 2021.

So perhaps we are in for some lower-performing years. Guessing which is which is a challenge that even the professionals rarely win.

Beating the Market
Are you willing to pay a professional who devotes full time to the job of beating the market? If so, based on the latest statistics from DJ-S&P, you’re likely to be very disappointed.

They track actively managed mutual fund performance compared to the indexes. And their statistics are enlightening. The just-released mid-year 2021 report concludes: “In 15 out of 18 categories of domestic equity funds, the majority of actively managed funds underperformed their benchmarks.”

Specifically, of the actively managed large company funds (where managers are paid to outperform the S%P 500 index), at year-end 2019 (before the COVID pandemic) 71% of actively managed large-cap funds failed to beat the S&P 500 index!

At year-end 2020, 60 % of those actively managed large company funds failed to beat the S&P 500 index.
And at mid-year 2021, despite market records set repeatedly, 58% of large company funds failed to beat the S&P 500 index.

The failure to “beat the market” is even more glaring in the category of Small Cap funds, where money mangers ae supposed to use their expertise to find hidden gems that will outperform. Yet for the first 6 months of 2021, 78% of small-cap managers failed to beat their benchmark small cap index.

So, whether you’re intrigued by the big winning claims of a generation that is tuned in to online free trading, or just trying to choose the “best” fund in your 40l(k) plan, reconsider the time and energy and costs spent on trying to beat the market. The statistics show that you’ll do just fine, if you match the market performance – over time!

Time, not Timing
Numerous studies have shown that investors who try to “time” the market – getting in and out to maximize gains – overall tend to fall behind. Don’t take my word for it. Nobel Laureate William Sharpe found that a market timer would have to be accurate 74% of the time to beat a passive portfolio.

A regular monthly contribution to that low-cost index fund ensures that you likely won’t buy at the bottom or the peak. But as long as you stick to the plan, and don’t “chicken out” when the market is falling (allowing your regular contribution to buy more shares at lower prices), history says you’ll come out ahead over a 20-year period.

The stock market makes headlines based on emotions. And the market always goes to extremes. You’ll do just fine investing “on average” to create a retirement portfolio.
So stop stressing over stock market headlines. In the end, this average investor will have the last laugh, as well as saving a small fortune in fees. And that’s The Savage Truth.

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