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Average is Fine

Terry Savage, Tribune Content Agency on

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.

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-19 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.

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