Ten years ago our training manager, Adrian McMaster, was the humorist for Alan Kohler’s Eureka Report, which has since become part of the Murdoch Press. In recent years you will have heard us ‘banging on’ about how average returns are actually wonderful. But our thoughts are not new: here is what Adrian was saying about being average on June 6, 2008.
Few investors may have heard of a small town in the US Mid-West called Lake Wobegon. This is a pity because, by all reports, it is a pretty little place and one well worth visiting. On the road leading in there is a sign, which reads: Welcome to Lake Wobegon, where all the men are strong, all the women are good looking and all the children are above-average.
Lake Wobegon, of course, doesn’t really exist. It was created by Garrison Keilor for his Prairie Home Companion radio series so that he could take the mickey out of his hubristic countrymen. Nevertheless, I thought of Lake Wobegon recently when I read Michael Pascoe’s analysis of the latest Russell/ASX Long-Term Investing Report (see Winning equation = DIY shares franking). The report details the average returns for various investment classes (and various investor types) over the past 10 and 20 years. For me, the thing that most stood out was that the two most common investment classes (shares and residential property) had both done well over both those periods.
Very well, actually. If the investor was a DIY fund, the after-tax return for the previous 10 years averaged 13.3% for shares and 10.6% for residential property. If the investor was an individual in the top tax bracket, the after-tax return for the same period averaged 10.6% for shares and 8.8% for residential property. Remember, these are the average returns. And what they show is that, regardless of which asset class you chose, being average was no bad thing. An investment returning 13.3% will double your money every 5.4 years. It takes just 8.1 years for the investment earning 8.8% to double. The average investor in either property or shares doubled their money at least once over the past 10 years.
Despite that, when was the last time you heard someone throw open their window and shout “I am average and I am proud! Not to mention twice as wealthy as I was a mere eight years ago.”
I have never heard anyone say that. This is because being average is embarrassing. Now that no one smokes or drinks anymore, mediocrity has become almost the last social taboo. A few years ago, a financial planner even told me that investors who accept average returns are being un-Australian. Citing the Australian cricket team, he argued that Australians are a people in constant pursuit of excellence. Accepting average investment returns is anathema to them. I could only reply that if that was his experience he and I must have grown up in different suburbs. I also pointed out that I had grown up in the same suburb as Warnie, which I felt lent weight to my argument that broad-based outperformance is really beyond most of us.
We humans intensely dislike being average. This is the case even though, especially in Australia, being average is usually pretty good – and not just when it comes to investing. It means, for example, that we have the fifth highest life expectancy of any country on the planet. Living longer gives us a particular benefit, as there are more lots of eight years during which our money can double. The average Australian lives in a three-bedroom home with two televisions, internet access, earns $58,000 a year and has sex almost twice a week. Unless they live in a house with young children, in which case they almost have sex twice a week.
So, if you are an average investor you are probably feeling somewhat unhappy about things. What should you do? There are two options that might help. The first is to join a support group: Average Investors Anonymous. They meet every Thursday in a small room in the Stock Exchange building. Please knock before entering and keep your voice down: these people are fragile.
Alternatively, visit the website of my new business venture, an equity-market fund manager we are calling Lake Wobegon Capital. You might have heard our slogan: “Trust your money to Lake Wobegon Capital, where all the analysts are smart, all the advisers are good looking and all the returns are above average.” You’d be un-Australian not to invest.
Adrian McMaster is a registered psychologist and qualified financial planner at the Dover Group.
(if you want to see the original article, click here).