What's a good analogy for average returns?

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TareNeko
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What's a good analogy for average returns?

Post by TareNeko » Thu Feb 16, 2017 12:58 am

When you try to explain someone that getting the average market return is a good thing, you just loose their interest very quickly. Because everyone has a relative or friend who beats the market. If you tell someone that average real return of the stock market is 7%, they immediately look down on such a small number. Usually they talk about a stock or actively managed fund that returned 20% on some arbitrary time frame. At that moment, when you try to explain the cost of expenses, tax implications, risk, and diversification, they have already lost you.

So, do you have a good analogy to explain why and how getting average market return is desirable?

Or is the "average market return" a negative expression and we should use something else?

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Re: What's a good analogy for average returns?

Post by carolinaman » Thu Feb 16, 2017 9:11 am

You could say that your investment strategy beats 85% of all investors over the long run. That should pique their interest and give you an opportunity to explain it in a little more detail.

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Re: What's a good analogy for average returns?

Post by galeno » Thu Feb 16, 2017 9:43 am

You need to take a difficult and frustrating course. You go to class. The professor offers two choices:

1. Leave now with a final grade of B+.

2. Take the course and be graded according to: 10% "A", 20% "B", 50% "C", 20% "D", and 10% "F".

Bogleheads choose 1.
AA = 40/55/5. Expected CAGR = 3.8%. GSD (5y) = 6.2%. USD inflation (10 y) = 1.8%. AWR = 4.0%. TER = 0.4%. Port Yield = 2.82%. Term = 33 yr. FI Duration = 6.0 yr. Portfolio survival probability = 95%.

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Re: What's a good analogy for average returns?

Post by MI_bogle » Thu Feb 16, 2017 9:55 am

There's not a sexy and attention-grabbing explanation or analogy that I have ever read

It's mathematically impossible for everybody to be consistently above average. You have to first convince the person you are talking with that it is a loser's game, and that there is no way to identify in advance which active fund or manager might outperform. And explain the concept of survivorship bias

Once you have done that, you can use the coin flipping analogy of a 50,000 seat stadium full of people. Everybody flips a coin. Those who flip a tails sit down. Those that flip a heads, flip again. After 10 rounds, there's only 50 people left standing in the stadium. Did they use skill to flip 10 heads in a row? Of course not. Could you have predicted in advance who those 50 people were? of course not

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Re: What's a good analogy for average returns?

Post by HenryBemis » Thu Feb 16, 2017 10:07 am

Best one I ever read was to look at investing as golf. A HUGE majority of people cannot shoot par on a pro-course. Look at average returns as par. If you had to play golf with a bunch of pro's for money and you can choose an option to get accept par...etc, etc, ect.

I liked it anyway. I also stink at golf!

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Re: What's a good analogy for average returns?

Post by oldcomputerguy » Thu Feb 16, 2017 10:09 am

MI_bogle wrote:There's not a sexy and attention-grabbing explanation or analogy that I have ever read

It's mathematically impossible for everybody to be consistently above average. You have to first convince the person you are talking with that it is a loser's game, and that there is no way to identify in advance which active fund or manager might outperform.
A good demonstration of the impossibility of predicting winners is the Callan Periodic Table. It is a compilation of rankings of asset classes over the last twenty years, showing winners and losers. Show this to your friends, and ask them to look at it and then decide what will be next year's hot investment.
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Re: What's a good analogy for average returns?

Post by JupiterJones » Thu Feb 16, 2017 10:12 am

galeno wrote:You need to take a difficult and frustrating course. You go to class. The professor offers two choices: [...] Bogleheads choose 1.
Bill "The Coffeehouse Investor" Schultheis uses a similar analogy he calls "Outfox the Box". It's probably my favorite way to put it:

http://www.coffeehouseinvestor.com/coff ... x-the-box/

Maybe instead of "average" returns we call them "maximum likelihood" returns, or something like that?
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Re: What's a good analogy for average returns?

Post by KlangFool » Thu Feb 16, 2017 10:27 am

TareNeko wrote:When you try to explain someone that getting the average market return is a good thing, you just loose their interest very quickly. Because everyone has a relative or friend who beats the market. If you tell someone that average real return of the stock market is 7%, they immediately look down on such a small number. Usually they talk about a stock or actively managed fund that returned 20% on some arbitrary time frame. At that moment, when you try to explain the cost of expenses, tax implications, risk, and diversification, they have already lost you.

So, do you have a good analogy to explain why and how getting average market return is desirable?

Or is the "average market return" a negative expression and we should use something else?
TareNeko,

I think you miss a bigger issue. Normal people do not save enough to fund their retirement with an average return. So, why would they listen to you? If this is true, they would have to save more and spend less. They like to dream that their retirement is fully funded with an above average return of 10% or higher.

I can reach my goal with a below average return. So, an average return is great news and good enough to me.

KlangFool

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Re: What's a good analogy for average returns?

Post by avalpert » Thu Feb 16, 2017 10:35 am

HenryBemis wrote:Best one I ever read was to look at investing as golf. A HUGE majority of people cannot shoot par on a pro-course. Look at average returns as par. If you had to play golf with a bunch of pro's for money and you can choose an option to get accept par...etc, etc, ect.

I liked it anyway. I also stink at golf!
I don't think this is a good analogy - the problem is par in golf isn't zero sum. So using this analogy the takeaway may be that all I need to do is be a smarter investor and I can consistently break par - which wile true in golf is unlikely to be true in the market.

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Re: What's a good analogy for average returns?

Post by mcraepat9 » Thu Feb 16, 2017 10:36 am

With all due respect, if obtaining market returns amounts to doing better than 80+% of investors, characterizing it as "average" is a bit of a misnomer.
Amateur investors are not cool-headed logicians.

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Re: What's a good analogy for average returns?

Post by Nate79 » Thu Feb 16, 2017 10:44 am

mcraepat9 wrote:With all due respect, if obtaining market returns amounts to doing better than 80+% of investors, characterizing it as "average" is a bit of a misnomer.
Very much agree. The term average return is very misleading. With TSM you get the market return minus expenses (which is very low ER at Vanguard, Fidelity, etc). So saying you get THE market return is saying that you never lose to the market.

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Re: What's a good analogy for average returns?

Post by JupiterJones » Thu Feb 16, 2017 10:46 am

mcraepat9 wrote:With all due respect, if obtaining market returns amounts to doing better than 80+% of investors, characterizing it as "average" is a bit of a misnomer.
A good point. It is an average market return (that is, the compound annual growth rate of the market over a certain period of time). It truly is what the market would be expected to return, on average, if you were to invest in it.

But such a return would be "above average" compared to other investors. I suppose it is important to clarify the context in which the word is being used.
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TareNeko
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Re: What's a good analogy for average returns?

Post by TareNeko » Thu Feb 16, 2017 11:01 am

Very good responses.

I didn't get the golf analogy, but that's because I don't know anything about golf.

I think it is better to say that I get market return, as opposed to average return. I also like to point that the way I invest beats 80%+ professional investors (imagine the % of individual investors I beat).

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TareNeko
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Re: What's a good analogy for average returns?

Post by TareNeko » Thu Feb 16, 2017 11:05 am

KlangFool,

You have a good point. I have two types of people where I discuss investing. First type is the one you mention. The one that doesn't save enough. It is very a different discussion with that type of people.

Second type of people are mostly coworkers (engineers). I'm working with very smart, hard working and competitive people. As far as I'm concerned, most of them are more intelligent than I am. Being engineers, it is easy for us to think that we can do better and beat others. So it becomes harder to convince them :)
KlangFool wrote:TareNeko,

I think you miss a bigger issue. Normal people do not save enough to fund their retirement with an average return. So, why would they listen to you? If this is true, they would have to save more and spend less. They like to dream that their retirement is fully funded with an above average return of 10% or higher.

I can reach my goal with a below average return. So, an average return is great news and good enough to me.

KlangFool

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Re: What's a good analogy for average returns?

Post by KlangFool » Thu Feb 16, 2017 11:10 am

TareNeko wrote:KlangFool,

You have a good point. I have two types of people where I discuss investing. First type is the one you mention. The one that doesn't save enough. It is very a different discussion with that type of people.

Second type of people are mostly coworkers (engineers). I'm working with very smart, hard working and competitive people. As far as I'm concerned, most of them are more intelligent than I am. Being engineers, it is easy for us to think that we can do better and beat others. So it becomes harder to convince them :)
KlangFool wrote:TareNeko,

I think you miss a bigger issue. Normal people do not save enough to fund their retirement with an average return. So, why would they listen to you? If this is true, they would have to save more and spend less. They like to dream that their retirement is fully funded with an above average return of 10% or higher.

I can reach my goal with a below average return. So, an average return is great news and good enough to me.

KlangFool
TareNeko,

I work with those people all the time. And, I am one of them. For them, the biggest problem is that they do not understand the tax savings that they can achieve with Trad. 401K. If they max up their Trad. 401K, they will do fine under any situations. At the 25% or higher marginal tax rate, it is easy to do with the tax savings. So, tax planning topic like Trad. 401K and Roth IRA are more important to this group of people.

So, explain to them how they can contribute more to Trad. 401K with minimal impact to their take-home pay. Teach them to avoid Roth 401K.

KlangFool

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Re: What's a good analogy for average returns?

Post by linenfort » Thu Feb 16, 2017 11:17 am

TareNeko wrote:Or is the "average market return" a negative expression and we should use something else?
To my friends, I usually say, "when the market does well you get your fair share. During downturns, you will not lose any more than anyone else."

Of course, the "anyone else" has to be clarified, because someone out there is holding Tesla as it soars while the broad market drops, but I always do clarify it.

By the way, it's "lose" with one 'o', not loose.

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Re: What's a good analogy for average returns?

Post by midareff » Thu Feb 16, 2017 11:19 am

carolinaman wrote:You could say that your investment strategy beats 85% of all investors over the long run. That should pique their interest and give you an opportunity to explain it in a little more detail.

and include ...... that percentage includes all professional money managers, hedge funds and private individual investors and the few who are able to outperform over a short period, or a few years, are impossible to predict in advance. Personally, I like the Bill Miller (Legg Mason Value Trust example) of a guy who beat the S&P Index for 16 years in a row only to give it all back and more.

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Re: What's a good analogy for average returns?

Post by David Jay » Thu Feb 16, 2017 11:24 am

TareNeko wrote:Very good responses.

I didn't get the golf analogy, but that's because I don't know anything about golf.

I think it is better to say that I get market return, as opposed to average return. I also like to point that the way I invest beats 80%+ professional investors (imagine the % of individual investors I beat).
I like this...

[edit] and I would add that the "market return" is established by tens of thousands of very smart MBAs on Wall Street with the best information and the fastest execution times.

And I get the same return as them (in aggregate).
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

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Re: What's a good analogy for average returns?

Post by kolea » Thu Feb 16, 2017 12:18 pm

TareNeko wrote: So, do you have a good analogy to explain why and how getting average market return is desirable?

Or is the "average market return" a negative expression and we should use something else?
No, I have nothing better and decided I am better off not talking about investing with friends or family. I would comment that many of the threads here are concerned with eking out better returns than just the TSM average, so the reluctance to settle for the average is pretty wide-spread.
Kolea (pron. ko-lay-uh). Golden plover.

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Re: What's a good analogy for average returns?

Post by thenextguy » Thu Feb 16, 2017 12:27 pm

Instead of average return, call it the "total market return."

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Re: What's a good analogy for average returns?

Post by Danzangdc » Thu Feb 16, 2017 12:46 pm

TareNeko wrote:Very good responses.

I didn't get the golf analogy, but that's because I don't know anything about golf.
Don't use any analogies to games of skill. Because it invites the response: "Well, then I'll go with the Tiger Woods of advisors." For a lay investor, active investment is a game of pure luck.

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Re: What's a good analogy for average returns?

Post by mmmodem » Thu Feb 16, 2017 1:42 pm

My experience is you can't sugarcoat it. If SUPER FANTASTIC returns is 7%, it still pales in comparison to that guy that bought X company and got 20% return. You can't sugarcoat the numbers. All you can do is teach/lead by example.

As another already stated, that they have any investments at all indicates they are above average and they are savers. If they didn't have any savings, that's when I worry.

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Re: What's a good analogy for average returns?

Post by boglephreak » Thu Feb 16, 2017 3:29 pm

galeno wrote:You need to take a difficult and frustrating course. You go to class. The professor offers two choices:

1. Leave now with a final grade of B+.

2. Take the course and be graded according to: 10% "A", 20% "B", 50% "C", 20% "D", and 10% "F".

Bogleheads choose 1.
i like this, except i would say "you show up to the first day of four-year university, and they offer you a diploma with a B+ average or ....." the problem with shooting for the moon is that its a long term job whereas market return is buy and hold. three months for the chance of getting that A might not be that big of a deal, four years is another story. ;-) great analogy though.

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Re: What's a good analogy for average returns?

Post by BogleMelon » Thu Feb 16, 2017 3:32 pm

Have you tried rule 72? Something like "7% means your money will be doubled every 10 years even when you don't invest a penny but the initial contribution amount"
"One of the funny things about stock market, every time one is buying another is selling, and both think they are astute" - William Feather

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Re: What's a good analogy for average returns?

Post by Vanguard Fan 1367 » Thu Feb 16, 2017 3:43 pm

I didn't catch on to the joys of the average return until I listened a couple of times to a recorded lecture from a dental conference I had on my I Pod recommending Bogle's books for investment advice. I don't know how many folks would take your advice to read one or more of his books but that is what it took for me to understand the magic of "average returns."

If someone would watch a YouTube video there are a number of great Bogle videos available.

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Re: What's a good analogy for average returns?

Post by Random Walker » Thu Feb 16, 2017 5:42 pm

If you have one foot on burning coals and one foot in an ice bucket, on average your feet are quite comfortable

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Re: What's a good analogy for average returns?

Post by Enganerd » Fri Feb 17, 2017 9:30 am

Not to hijack the thread but can some one point me to the articles or research indicate that buy and hold index investors are in the top 80-85% of investors over longer periods. I've seen analysis of actively managed funds vs index funds but i have found that relaying those statistics to individual value investors does little to convince them that they cannot beat the market. And many of them do claim to beat the market, even though I am skeptical of how well they track performance.

So when we say that indexing will lead to being in the top 80% of investors over a long time period, say 15 years plus, are we talking only about active mutual funds vs index funds or can it be fairly extrapolated to all active investors vs passive investors?

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Re: What's a good analogy for average returns?

Post by JupiterJones » Fri Feb 17, 2017 10:40 am

Random Walker wrote:If you have one foot on burning coals and one foot in an ice bucket, on average your feet are quite comfortable
Not to mention the fact that you could also claim to have an above-average number of feet for a human.

(Since there are a lot more people with no feet or only one foot than there are people with three or more feet, the average number of feet per person is less than two. Having two feet is, mathematically, "above average".)
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Re: What's a good analogy for average returns?

Post by Jags4186 » Fri Feb 17, 2017 10:47 am

Instead of framing the argument as guaranteed average returns frame it as best chance of achieving your objectives.

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Re: What's a good analogy for average returns?

Post by David Jay » Fri Feb 17, 2017 10:48 am

JupiterJones wrote:
Random Walker wrote:If you have one foot on burning coals and one foot in an ice bucket, on average your feet are quite comfortable
Not to mention the fact that you could also claim to have an above-average number of feet for a human.

(Since there are a lot more people with no feet or only one foot than there are people with three or more feet, the average number of feet per person is less than two. Having two feet is, mathematically, "above average".)
And the worst part of democracy is that half of all voters are below average (apologies to "Lake Wobegon", where all of the children are above average).
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Re: What's a good analogy for average returns?

Post by Alchemist » Fri Feb 17, 2017 11:48 am

I generally avoid much discussion on investing with friends and family, and when asked I usually say that I focus on avoiding unnecessary costs and point them in the direction of Bogle's books.

But for me personally, what really made it click was Jack's harping on the simple rules of humble arithmetic and the Got Rocks family story. If all investors are the index, then only half can beat the average (by definition). After costs, fewer than half beat it. Thus by being a low cost indexer you already beat the majority of investors by default. Add to that the half that 'beat' the market one year are highly likely to be losers the next, thus leading to indexers out performing (without even trying!) 85% of investors over the long haul. This is not based on fancy back testing, nobel winning models, or a complex computer program. I it is actually just arithmetic and how the market must work based on it.

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Re: What's a good analogy for average returns?

Post by goblue100 » Fri Feb 17, 2017 11:57 am

Financial planners are savers. They want us to be 95 percent confident we can finance a 30-year retirement even though there is an 82 percent probability of being dead by then. - Scott Burns

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Re: What's a good analogy for average returns?

Post by LeisureLee » Fri Feb 17, 2017 12:05 pm

Enganerd wrote:Not to hijack the thread but can some one point me to the articles or research indicate that buy and hold index investors are in the top 80-85% of investors over longer periods. I've seen analysis of actively managed funds vs index funds but i have found that relaying those statistics to individual value investors does little to convince them that they cannot beat the market. And many of them do claim to beat the market, even though I am skeptical of how well they track performance.

So when we say that indexing will lead to being in the top 80% of investors over a long time period, say 15 years plus, are we talking only about active mutual funds vs index funds or can it be fairly extrapolated to all active investors vs passive investors?
See https://us.spindices.com/documents/spiv ... r-2016.pdf, for example, where Standard and Poor's Compares mutual fund performance to their benchmark indices.

I explain indexing to people by saying you can get the same returns you see in the news (S&P) without having to correctly find a great manager, fund, or stock. If people press that they don't want to settle for average, I sometimes make the argument that active managers must collectively also earn the average return (a surprisingly difficult point to explain) and that with 1% fees, your manager has to beat the average active manager by 1% just to tie the index (in a market giving ~7% returns for stock and bond mixes). If they still argue, I give up. I think some people have to lose some real money to be convinced that they can't pick winners. I got lucky and did that right out of the gate, when "real money" to me wasn't really that much money. Yay, starting investing in 2000. =)

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Re: What's a good analogy for average returns?

Post by ReadyOrNot » Fri Feb 17, 2017 3:18 pm

The point is that few people can beat the average by much, so costs determine performance.
If you are on a main street with smooth traffic and synchronized traffic lights, you can drive with the flow like everybody else, calm down and accept the average good traffic. Or, you can try all the alternative routes, drive like a maniac, and pay the extra time cost of hitting all the extra red lights and bad detours. Sometimes it just costs too much to beat the average--so if the average is pretty good, relax and enjoy it.

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Re: What's a good analogy for average returns?

Post by Enganerd » Fri Feb 17, 2017 6:05 pm

LeisureLee wrote:
Enganerd wrote:Not to hijack the thread but can some one point me to the articles or research indicate that buy and hold index investors are in the top 80-85% of investors over longer periods. I've seen analysis of actively managed funds vs index funds but i have found that relaying those statistics to individual value investors does little to convince them that they cannot beat the market. And many of them do claim to beat the market, even though I am skeptical of how well they track performance.

So when we say that indexing will lead to being in the top 80% of investors over a long time period, say 15 years plus, are we talking only about active mutual funds vs index funds or can it be fairly extrapolated to all active investors vs passive investors?
See https://us.spindices.com/documents/spiv ... r-2016.pdf, for example, where Standard and Poor's Compares mutual fund performance to their benchmark indices.

I explain indexing to people by saying you can get the same returns you see in the news (S&P) without having to correctly find a great manager, fund, or stock. If people press that they don't want to settle for average, I sometimes make the argument that active managers must collectively also earn the average return (a surprisingly difficult point to explain) and that with 1% fees, your manager has to beat the average active manager by 1% just to tie the index (in a market giving ~7% returns for stock and bond mixes). If they still argue, I give up. I think some people have to lose some real money to be convinced that they can't pick winners. I got lucky and did that right out of the gate, when "real money" to me wasn't really that much money. Yay, starting investing in 2000. =)
I should have been a little more clear. I meant to say that I have seen plenty of data showing that actively managed mutual funds underperform the index and or index funds most of the time. However, I am curious if there is data that the individual investor, Joe who only buy and holds index funds, say a total stock market fund has an 80% chance of out performing Jim who has a more active approach, such as maybe he's a value or momentum or sector weighting investor.

Now that I think about it I guess reliable data on the above example would be near impossible collect. There would be the grey area of how often the index investor reallocates and when does he become active and also how consistent and competent the active investor will be.

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Re: What's a good analogy for average returns?

Post by Enganerd » Fri Feb 17, 2017 6:10 pm

Alchemist wrote:I generally avoid much discussion on investing with friends and family, and when asked I usually say that I focus on avoiding unnecessary costs and point them in the direction of Bogle's books.

But for me personally, what really made it click was Jack's harping on the simple rules of humble arithmetic and the Got Rocks family story. If all investors are the index, then only half can beat the average (by definition). After costs, fewer than half beat it. Thus by being a low cost indexer you already beat the majority of investors by default. Add to that the half that 'beat' the market one year are highly likely to be losers the next, thus leading to indexers out performing (without even trying!) 85% of investors over the long haul. This is not based on fancy back testing, nobel winning models, or a complex computer program. I it is actually just arithmetic and how the market must work based on it.
That carries a lot of weight with me too, though more conceptual than analytical. How does the above arithmetic actually get to 80-85%. I figure it would matter one a reversion to the mean factor. How many of those that outperformed the market one year will under perform the next or the one after that.

Aside from that curiousity, that arithmetic was big for me to decided and never even mess with any investing style other than buy and hold index funds. Especially because I personally don't enjoy spending my free time studying various businesses in hopes of finding a good value buy.

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Re: What's a good analogy for average returns?

Post by friar1610 » Sat Feb 18, 2017 8:51 am

Here's an off-the-wall appriach...Remember the town in Prairie Home Companion where all the children were above average? I think everyone quickly recognizes the irony, humor and mathematical impossibility of that. See if you can get your friends to recognize that it's similarly crazy to think everyone they know can achieve above average returns from the market. Maybe if they'll stick with you that far you can get into the nitty-gritty details that BHs understand and profess.
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Re: What's a good analogy for average returns?

Post by chatbotte » Sat Feb 18, 2017 9:16 am

TareNeko wrote:When you try to explain someone that getting the average market return is a good thing, you just loose their interest very quickly. Because everyone has a relative or friend who beats the market. If you tell someone that average real return of the stock market is 7%, they immediately look down on such a small number. Usually they talk about a stock or actively managed fund that returned 20% on some arbitrary time frame. At that moment, when you try to explain the cost of expenses, tax implications, risk, and diversification, they have already lost you.

So, do you have a good analogy to explain why and how getting average market return is desirable?

Or is the "average market return" a negative expression and we should use something else?
TareNeko,

You're wasting your precious time. Try telling someone who just hit the jackpot that lottery tickets are a bad buy. :)

pkcrafter
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Re: What's a good analogy for average returns?

Post by pkcrafter » Sat Feb 18, 2017 10:36 am

There are average market returns and average investor returns, and they are quite different.

I just finished a book by Spencer Jakab titled Heads I Win, Tails I Win, in which he talks about investors living in Lake Moneybegone, where all the women are wise, all the men are hard-working, and all the investors are below average. This is an interesting book because it comes from someone who is a Wall St. pro, a former stock analyst and is now a financial journalist.

Here's a quote from an interview:
SJ: Probably the most surprising thing I found in doing research for the book is how unaware people are of their own historical returns other than a vague sense that they really should have more money. If people had to rate themselves from zero to 10 relative to all investors and also relative to the market, the median guess would be a 7 on both. The reality is that they’re a 5 and a 2, respectively. So modesty won’t cut it.

My approach was to appeal to their greed instead. The title sounds like a “get rich quick” type book, which this certainly isn’t. But I’m guessing it will get their attention. Telling people that their nest egg could be twice as large or more with a few changes to their investing habits is not only true but, I hope, an attention-getter.
https://abnormalreturns.com/2016/07/13/ ... ils-i-win/

In my own experience working with other chemical engineers, I noticed that virtually all of those I knew well used wealth managers, which they placed in high regard and never questioned. None would ever be interested in reading a book on investing and so I never discussed finance with them. Having a personal wealth manager was something like a status symbol, and the higher the fees the higher the status.



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When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

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FrugalInvestor
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Re: What's a good analogy for average returns?

Post by FrugalInvestor » Sat Feb 18, 2017 10:57 am

What Bogleheads get is not "average" returns but, in short, well above average returns net of all costs. Those costs include both direct monetary expense (fund expenses, broker commissions and trading expenses, tax expense, etc.) as well as the indirect expense of making poor decisions (either by the individual or their adviser) about investments. Bogleheads only begin with "average" returns but end up with superior returns.
Last edited by FrugalInvestor on Sat Feb 18, 2017 12:29 pm, edited 1 time in total.
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Nova1967
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Re: What's a good analogy for average returns?

Post by Nova1967 » Sat Feb 18, 2017 12:27 pm

galeno wrote:You need to take a difficult and frustrating course. You go to class. The professor offers two choices:

1. Leave now with a final grade of B+.

2. Take the course and be graded according to: 10% "A", 20% "B", 50% "C", 20% "D", and 10% "F".

Bogleheads choose 1.
Why a B+, sounds like a C would replicate average.

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galeno
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Re: What's a good analogy for average returns?

Post by galeno » Sat Feb 18, 2017 6:24 pm

Whoosh! Right over your head.
Nova1967 wrote:
galeno wrote:You need to take a difficult and frustrating course. You go to class. The professor offers two choices:

1. Leave now with a final grade of B+.

2. Take the course and be graded according to: 10% "A", 20% "B", 50% "C", 20% "D", and 10% "F".

Bogleheads choose 1.
Why a B+, sounds like a C would replicate average.
AA = 40/55/5. Expected CAGR = 3.8%. GSD (5y) = 6.2%. USD inflation (10 y) = 1.8%. AWR = 4.0%. TER = 0.4%. Port Yield = 2.82%. Term = 33 yr. FI Duration = 6.0 yr. Portfolio survival probability = 95%.

qwertyjazz
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Re: What's a good analogy for average returns?

Post by qwertyjazz » Sat Feb 18, 2017 6:54 pm

Average returns is investing
Trying to beat it is gambling - not in some fancy cruise ship gambling but in street corner craps game Dave Chappelle Ashy Larry style
G.E. Box "All models are wrong, but some are useful."

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mikestorm
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Re: What's a good analogy for average returns?

Post by mikestorm » Sun Feb 19, 2017 5:46 am

An analogy I've used before to justify a passive investing strategy is driving on the highway with traffic. If you're moving with the flow of traffic but the flow of traffic happens to be moving at 35 miles an hour, it is what it is. However if everyone else is going 65 and you're stuck in the one lane going 35, because someone doing 80 cut somebody off in your lane in front of you, your blood pressure is going to boil. It might even cause you to drive equally aggressively, increasing the chances you'll be in a wreck at some point. This is active investing.

Passive investing essentially guarantees you'll never move slower than the flow of traffic, at the cost of never moving faster than the flow of traffic. Yet even so, as you travel, you can't help but notice other poor souls desperately trying to get ahead of you by bobbing and weaving in and out of lanes, only to fall further behind.

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Re: What's a good analogy for average returns?

Post by avalpert » Sun Feb 19, 2017 12:25 pm

mikestorm wrote:An analogy I've used before to justify a passive investing strategy is driving on the highway with traffic. If you're moving with the flow of traffic but the flow of traffic happens to be moving at 35 miles an hour, it is what it is. However if everyone else is going 65 and you're stuck in the one lane going 35, because someone doing 80 cut somebody off in your lane in front of you, your blood pressure is going to boil. It might even cause you to drive equally aggressively, increasing the chances you'll be in a wreck at some point. This is active investing.

Passive investing essentially guarantees you'll never move slower than the flow of traffic, at the cost of never moving faster than the flow of traffic. Yet even so, as you travel, you can't help but notice other poor souls desperately trying to get ahead of you by bobbing and weaving in and out of lanes, only to fall further behind.
Not a fan of this analogy at all - I can easily beat the average flow of traffic. Traffic flow has glaring inefficiencies that don't get arbitraged away (like people not using the full acceleration lane or cruising in the left but not using the right lane at all). Anyone who recognizes they consistently beat the time google maps says it will take them to get somewhere may infer they can consistently beat the market too.

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Sandtrap
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Re: What's a good analogy for average returns?

Post by Sandtrap » Sun Feb 19, 2017 1:05 pm

HenryBemis wrote:Best one I ever read was to look at investing as golf. A HUGE majority of people cannot shoot par on a pro-course. Look at average returns as par. If you had to play golf with a bunch of pro's for money and you can choose an option to get accept par...etc, etc, ect.

I liked it anyway. I also stink at golf!
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