You've probably seen this chart, comparing the returns of the "average investor" to that of various other asset classes.
The conclusion this chart tries to convey is that the performance of the "average investor" is awful.
This is a useful conclusion, because this "study" is sold to financial advisors to use in their marketing materials. If you convince investors that they don't know what they are doing, you can generate fees for a long time. Companies like JP Morgan simply reprint the results.
The fun part is that the majority of people who quote this study, do not know how it is calculated. Nor where it came from. Or even reviewed the paper it came from (it's hard to obtain, and you need to pay for it).
Have you ever stopped to think for yourself, how exactly did they calculate the performance of the average investor?
Also, how did they determine who the average investor is?
After all, if you look at all investors, they should in theory have overall returns that are close to what the total of all assets generated (minus fees, taxes etc)
Even if a lot of investors lose money to overtrading, and dumb stock picks, there have to be other investors out there to offset that foolishness, at least to some portion.
And to add insult to injury, a lot of these "average investors" out there also have a financial advisor too.
Something just doesn't add up.
By the way, it is easy to lead people to conclusions, if you compare apples to oranges
1. From my research, the study looks at mutual fund flows and compares the returns of someone who essentially dollar cost averages monthly over a 20 year time frame (e.g. 2002-2022) to someone who invested a lump sum amount (e.g in 2002)
You can run the numbers yourself for any investment, but if you bought $100 worth of S&P 500 every month between 2002 and 2022, your end results would be less than someone who simply put $24,000 in S&P 500 at the start of 2002.
In one of the rebuttals of the study, someone found out that the performance of the "average investor" was very similar to that of someone who simply dollar cost averaged every month for the 20 years. This is why many believe that the performance of average investor is mostly an attempt to compare apples to oranges, in order to "prove" how inadequate the average investor is.
2. Comparing the fund flows for all asset classes also does not provide a useful comparison.
That's because certain asset classes like money market mutual funds are used like a savings account for example. The goal of that money should not be compared to performance of say S&P 500. That's an apples to oranges comparison.
Note, that doesn't mean that the so called behaviour gap does not exist (meaning that the average investor does worse than their benchmark). But it should not be as pronounced and as starkingly high.
There are other organizations out there that have attempted to calculate average returns. Morningstar being one of them. While there is a behaviour gap accross many asset classes (stocks/bonds etc), it is not that high if you try to be objective in how you setup your population, and make apples to apples comparisons.
Conclusion:
You need to trust, but verify.
Overall, I belive that the personal investor of today has the right tools to build the right portfolios to suit their needs. Information is abundant, commissions are pretty much non-existent, and a lot of communities (e.g. Dividend Growth Investors) are aware of the benefits of long-term investing, minimal turnover, diversification, simple tax planning etc. The important thing to do is to educate yourself, as your money is on the line. Nobody cares more about your money than you do.
