Why Invest in Average?

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jrbdmb
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Why Invest in Average?

Post by jrbdmb » Mon May 22, 2017 2:31 pm

Interesting take on anti-Boglehead investing from Invesco:

https://www.ispot.tv/ad/ACpl/invesco-un ... in-average

(Note that I saw this ad this morning on CNBC. That's what i get for tuning away from Kelly and Ryan. :happy )

Chadnudj
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Re: Why Invest in Average?

Post by Chadnudj » Mon May 22, 2017 2:38 pm

I love that this commercial involves an expert artist building a needlessly complex and expensive installation of art over the course of an entire day, presumably, that only results in accomplishing its goal at night when a light shines on it at a specific angle. (In other words, active management)

Whereas if someone had "done average" they could have written "why invest in average?" on a white piece of paper using a marker in about 5 seconds, and that message would have been visible in almost every situation/scenario and would have cost considerably less in terms of materials and time. (In other words, passive index fund).
Last edited by Chadnudj on Mon May 22, 2017 2:45 pm, edited 1 time in total.

traveler90
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Re: Why Invest in Average?

Post by traveler90 » Mon May 22, 2017 2:42 pm

Someone asked me that once about index funds. I asked "Since when did top 10-15% become average?"

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midareff
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Re: Why Invest in Average?

Post by midareff » Mon May 22, 2017 2:44 pm

I invest in average because over an extended time period I will be better than at least 92% of those who didn't see things that way. That's still an A in my book with no use of time or sleepless nights.
Last edited by midareff on Mon May 22, 2017 2:45 pm, edited 1 time in total.

Independent George
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Re: Why Invest in Average?

Post by Independent George » Mon May 22, 2017 2:45 pm

It's a completely plausible idea which makes intuitive sense... It just doesn't quite work out that way in practice.

The question I have now is why so few funds manage to beat the indices - even accounting for survivor bias, shouldn't roughly 50% of funds be above average? And yet, it's not even close to that.

TheJoker
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Re: Why Invest in Average?

Post by TheJoker » Mon May 22, 2017 2:47 pm

Buffett has said "Common sense is not that common"

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Bendee
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Re: Why Invest in Average?

Post by Bendee » Mon May 22, 2017 2:58 pm

I noticed that the ad doesn't make any claims about Invesco doing better than average in that ad. I wonder why... :mrgreen:

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nisiprius
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Re: Why Invest in Average?

Post by nisiprius » Mon May 22, 2017 3:15 pm

(Shrug) Nothing interesting about it other than the cuteness of the presentation. I'm sure you've noticed that it doesn't make any rational point at all--it doesn't try to visually show how high-conviction investing can give better results than the average.

The sculptor could just as easily have made a sculpture that casts a shadow saying "The earth is flat" or "INVESCO LTD -> SLICED ON TV" or "Michael White, World's Best Sculptor," and it wouldn't necessarily be true just because the shadow says so.

It also starts off with an (almost certainly) factually incorrect statement: "It's been over a hundred years since the first stock index was created, as a benchmark for average." The Dow Jones Railroad Average began in 1884, the Dow Jones Industrial Average in 1896, neither is an "index" as the word "stock index" is understood (the methodology was developed by Irving Fisher in 1922), and neither was intended to be a "benchmark for average." They were intended to provide market timing signals through their relative movement. They could have said "sixty years" (S&P 500 index), or even "seventy-nine years" (Cowles Commission, "Common-Stock Indexes, 1871-1937") which would have been just as effective as rhetoric with the added benefit of being true.

The Vanguard "Life Ticker" ads were just as bad, though. Maybe worse.
Last edited by nisiprius on Mon May 22, 2017 3:19 pm, edited 2 times in total.
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ruralavalon
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Re: Why Invest in Average?

Post by ruralavalon » Mon May 22, 2017 3:17 pm

Because investing in a low ER index fund gives higher returns than most investors get. That isn't "average", is it?
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livesoft
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Re: Why Invest in Average?

Post by livesoft » Mon May 22, 2017 3:20 pm

Answer: Because I don't want to invest in Below Average.
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Majormajor78
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Re: Why Invest in Average?

Post by Majormajor78 » Mon May 22, 2017 4:19 pm

Independent George wrote: The question I have now is why so few funds manage to beat the indices - even accounting for survivor bias, shouldn't roughly 50% of funds be above average? And yet, it's not even close to that.
About 50% of active funds do beat the index every year... before expenses.

Jack Bogle spends quite a bit of time on this in Common Sense on Mutual Funds. When he charted out mutual fund returns they showed a nice familiar bell curve with the peak at about -1.5% behind the index. It's not a coincidence that when he first wrote that chapter 1.5% was about the average ER of funds at the time. It's not that some mutual fund managers can't beat the market, it's that they can rarely outperform greater than the fee's they charge.
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chuckb84
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Re: Why Invest in Average?

Post by chuckb84 » Mon May 22, 2017 7:10 pm

jrbdmb wrote:Interesting take on anti-Boglehead investing from Invesco:

https://www.ispot.tv/ad/ACpl/invesco-un ... in-average

(Note that I saw this ad this morning on CNBC. That's what i get for tuning away from Kelly and Ryan. :happy )

To avoid investing in below average, which you have about a 90% chance of doing, over a 10 year period, in actively managed funds.

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TheTimeLord
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Re: Why Invest in Average?

Post by TheTimeLord » Mon May 22, 2017 7:13 pm

traveler90 wrote:Someone asked me that once about index funds. I asked "Since when did top 10-15% become average?"
You are guaranteeing 10%-15% returns from Index funds?
IMHO, Investing should be about living the life you want, not avoiding the life you fear. | Run, You Clever Boy! [9085]

Independent George
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Re: Why Invest in Average?

Post by Independent George » Mon May 22, 2017 7:19 pm

TheTimeLord wrote:
traveler90 wrote:Someone asked me that once about index funds. I asked "Since when did top 10-15% become average?"
You are guaranteeing 10%-15% returns from Index funds?
He's saying that 85-90 percent of all active funds trail their benchmark.

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TheTimeLord
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Re: Why Invest in Average?

Post by TheTimeLord » Mon May 22, 2017 7:23 pm

Independent George wrote:
TheTimeLord wrote:
traveler90 wrote:Someone asked me that once about index funds. I asked "Since when did top 10-15% become average?"
You are guaranteeing 10%-15% returns from Index funds?
He's saying that 85-90 percent of all active funds trail their benchmark.
:oops: Thanks, I obviously malfunctioned. :oops:
IMHO, Investing should be about living the life you want, not avoiding the life you fear. | Run, You Clever Boy! [9085]

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arcticpineapplecorp.
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Re: Why Invest in Average?

Post by arcticpineapplecorp. » Mon May 22, 2017 7:25 pm

Nice to see the ad execs are finally getting around to trying to lure the hipsters into investing. Hopefully they find their way to bogleheads and avoid the 5.5% loads on the Invesco funds (even their S&P500 index fund -- SPIAX has a 5.5% load with a 0.59% expense ratio) :oops:

Shame on Invesco for continuing to fleece their customers.

Gotta read the fine print and know what you're paying:

https://www.invesco.com/portal/site/us/ ... cachetoken
Last edited by arcticpineapplecorp. on Mon May 22, 2017 7:27 pm, edited 1 time in total.
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blueblock
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Re: Why Invest in Average?

Post by blueblock » Mon May 22, 2017 7:26 pm

"Why invest in average?" speaks to the aspirational mindset of folks who want to thrive in an unsure marketplace. But the ad conveniently omits that actively-managed performance is hit or miss, and that whatever their fees are, they're being skimmed off the top of YOUR growth/earnings.

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knpstr
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Re: Why Invest in Average?

Post by knpstr » Mon May 22, 2017 7:34 pm

livesoft wrote:Answer: Because I don't want to invest in Below Average.
+1
Very little is needed to make a happy life; it is all within yourself, in your way of thinking. -Marcus Aurelius

Independent George
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Re: Why Invest in Average?

Post by Independent George » Mon May 22, 2017 7:35 pm

arcticpineapplecorp. wrote:Nice to see the ad execs are finally getting around to trying to lure the hipsters into investing. Hopefully they find their way to bogleheads and avoid the 5.5% loads on the Invesco funds (even their S&P500 index fund -- SPIAX has a 5.5% load with a 0.59% expense ratio)
Hey, if that's what it costs for a hand-crafted, artisan stock portfolio, then that's what they'll just have to pay for it...

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obafgkm
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Re: Why Invest in Average?

Post by obafgkm » Tue May 23, 2017 5:28 am

Chadnudj, I love your interpretation!

Jack FFR1846
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Re: Why Invest in Average?

Post by Jack FFR1846 » Tue May 23, 2017 6:35 am

Wow!

So many dog funds. Seems like the best looking funds (since inception) are "new". Why would I want to invest in something that's had a 2% return since inception (seems about average over the list)? If I want to base my investment by commercials, I know Edward Jones gives customers coffee and plays nice piano music and Nationwide has inspiring songs sung by unknown artists. I'd rather have boring (or no) ads and make more of a return.
Bogle: Smart Beta is stupid

ljb1234
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Re: Why Invest in Average?

Post by ljb1234 » Tue May 23, 2017 7:42 am

I don't think "average" is the right analogy for an index fund.
To use a golf analogy, the index is equivalent to "par".
Which, for golf, can be defined as "the number of strokes a first-class player should normally require for a particular hole or course."

As a golfer, if I get par on a hole, I am very happy! Same for my investment return.

Xyz214
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Re: Why Invest in Average?

Post by Xyz214 » Tue May 23, 2017 7:51 am

Independent George wrote:It's a completely plausible idea which makes intuitive sense... It just doesn't quite work out that way in practice.

The question I have now is why so few funds manage to beat the indices - even accounting for survivor bias, shouldn't roughly 50% of funds be above average? And yet, it's not even close to that.
Because average is not median. :)

Eric76
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Re: Why Invest in Average?

Post by Eric76 » Tue May 23, 2017 7:53 am

Every time I see a mutual fund commercial on tv it makes me think about how much investors in that family of funds is paying for that commercial. Pass.

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TheTimeLord
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Re: Why Invest in Average?

Post by TheTimeLord » Tue May 23, 2017 7:54 am

ljb1234 wrote:I don't think "average" is the right analogy for an index fund.
To use a golf analogy, the index is equivalent to "par".
Which, for golf, can be defined as "the number of strokes a first-class player should normally require for a particular hole or course."

As a golfer, if I get par on a hole, I am very happy! Same for my investment return.
Depends if you are playing in the U.S. Open or some weekly birdiefest tournament.
IMHO, Investing should be about living the life you want, not avoiding the life you fear. | Run, You Clever Boy! [9085]

Jags4186
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Re: Why Invest in Average?

Post by Jags4186 » Tue May 23, 2017 8:07 am

I really get the allure and marketing of "don't be average". I mean after all, to beat say the S&P 500 all you'd need to do is avoid a couple of bad stocks in the index and you'd win! Anyone should be able to pick a few junky stocks out of 500, right?

The problem is what was yesterday's darling is today's collapse. Today's dog is tomorrow's breakout star.

When your kids ask "why do I need to learn statistics--I'll never use this in real life" or whatever math class they happen to be taking, here is a perfect teaching example. Average (mean) returns are so far to the right of median and mode returns.

IlliniDave
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Re: Why Invest in Average?

Post by IlliniDave » Tue May 23, 2017 8:29 am

"...but investment isn't about achieving average, it's about achieving goals."

I would call BS and ask, "Who's goals? Invesco's revenue goals? Or my goals?"

Then I would call BS and say that

1. It's been shown that achieving benchmark returns less the smallest costs possible over time is clearly above average among comparable investing approaches. Refuting that stretches credibility to the breaking point.

2. In light of 1) it follows that index investing is a very viable candidate to achieve financial goals for anyone with realistic financial goals. By realistic financial goals I mean goals that match a person's starting point and earning ability. In other words, if you have $10,000, don't work and never intend to, and want to be a multi-billionaire, it is highly improbable any investing strategy will get you there (to include index funds and anything Invesco could dream up).
Don't do something. Just stand there!

Jags4186
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Re: Why Invest in Average?

Post by Jags4186 » Tue May 23, 2017 8:36 am

IlliniDave wrote:"...but investment isn't about achieving average, it's about achieving goals."

I would call BS and ask, "Who's goals? Invesco's revenue goals? Or my goals?"

Then I would call BS...
If anything you are able to achieve your goals with less risk because your index funds will likely beat the equivalent active fund meaning you can lower your equity exposure.

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JMacDonald
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Re: Why Invest in Average?

Post by JMacDonald » Tue May 23, 2017 8:57 am

Well, the Invesco S&P 500 Index Fund Class A SPIAX is definitely not average. You get to pay a 5.50% load and a .59% ER.
http://quotes.morningstar.com/chart/fun ... ture=en-US

Compared to Vanguard 500 Index Fund Admiral Class VFIAX. You only pay .04% ER with no load.
http://quotes.morningstar.com/chart/fun ... ture=en-US

Yes, Invesco is definitely above average!

You have to wonder who is investing in that fund.
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azanon
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Re: Why Invest in Average?

Post by azanon » Tue May 23, 2017 9:44 am

I don't know why you guys are settling on average either. All you have to do to beat that is find a good growth stock mutual fund averaging at least 12% returns, and a manager with a good track record of at least 5 years. This is what Dave Ramsey says, and he says the one he picked has done 12% since the 30s. :beer
:shock: :mrgreen:

ljb1234
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Re: Why Invest in Average?

Post by ljb1234 » Tue May 23, 2017 11:55 am

TheTimeLord wrote:
ljb1234 wrote:I don't think "average" is the right analogy for an index fund.
To use a golf analogy, the index is equivalent to "par".
Which, for golf, can be defined as "the number of strokes a first-class player should normally require for a particular hole or course."

As a golfer, if I get par on a hole, I am very happy! Same for my investment return.
Depends if you are playing in the U.S. Open or some weekly birdiefest tournament.
I'll take one anytime these days!

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bottlecap
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Re: Why Invest in Average?

Post by bottlecap » Tue May 23, 2017 11:57 am

traveler90 wrote:Someone asked me that once about index funds. I asked "Since when did top 10-15% become average?"
Well played. I'll have to remember that.

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whodidntante
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Re: Why Invest in Average?

Post by whodidntante » Tue May 23, 2017 12:43 pm

I'll make them a deal. Double their ERs. All of them. I'll still buy so long as I am guaranteed to receive the total return of the most suitable benchmark every year. If not, they write me a check.

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HomerJ
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Re: Why Invest in Average?

Post by HomerJ » Tue May 23, 2017 1:01 pm

Independent George wrote:It's a completely plausible idea which makes intuitive sense... It just doesn't quite work out that way in practice.

The question I have now is why so few funds manage to beat the indices - even accounting for survivor bias, shouldn't roughly 50% of funds be above average? And yet, it's not even close to that.
Well, first you deduct fees... So if a fund beats the market by 1%, but charges 1.2%, you would have done better with an index fund.

But, yes in general, you'd expect a large percentage of funds to be above average and beat the index fund.

But here's the thing, it's not the SAME funds every year.

So after ten years, there might be only 15% that have beaten the average 10 years straight. So just taking the "average" (index fund) might let you beat 85% of active funds without having to do anything at all.

And usually, those 15% that may indeed be run by highly skilled traders get super big from everyone wanting to invest in them (AFTER the fact), and a skilled manager has a lot harder time getting out-size returns with a couple billion under management, instead of 100 million. Investing $5 million in an under-valued small company (that grows 5x or 10x) can make a huge difference to your bottom line when you are playing with $100 million, not nearly as much when you have $3 billion.

With $3 billion, you're investing in all the same large well-known companies as everyone else.

GoldenFinch
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Re: Why Invest in Average?

Post by GoldenFinch » Tue May 23, 2017 1:28 pm

As livesoft aptly noted, average is better than below average. I was getting below average returns for years picking mutual funds myself and listening to financial advisors who didn't have my best interest at heart. I'm very happy with average and even happier that I'm a Boglehead who finally learned how to quit messing around with, and thus messing up, the finances.

We recently received a letter from a local independent "wealth management company" informing us we are in the top 7% financially (I'm guessing that they came to this conclusion by use of zip code) and that they should be managing our money to make US even more. LOL! I thought about making the letter into a paper airplane and mailing it back, but I didn't.

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