21 September 2021


21 September 2021

Why Average Investors Get Below Average Returns


Siobhan Blewitt



Why Average investors get below average returns - Stellan Capital

According to a recent Dalbar study, over the past 20 years the S&P 500 has advanced 6.1%, yet the average global investor has only achieved a mere 2.5% (barely beating the 2.2% inflation over the period).

Why Average investors get below average returns - Stellan Capital

What an incredible finding! It seems almost inconceivable that the average investor doesn’t achieve at least an average outcome. Let’s discuss the three most common investment mistakes that might be partially to blame.

Maybe we are too clever for our own good?

If the average investor only achieved an annualised return of 2.5%, we can conclude some of this underperformance came from bad timing. Mis-timing the deployment or withdrawal of capital (buy/sells) is a common issue with investors.

Using the S&P 500 as a long term example, since 1950 the range of market returns were very erratic and wide. However, since 1950, there has never been a 20-year period when global investors should not have made at least 6% per year in the stock market.

Why Average investors get below average returns - Stellan Capital

Timing the market is inherently – if not impossibly – hard. The best way to increase your chance of success is to take a long-term view with your investing approach and dollar cost average in or out of the market (e.g. simply averaging capital investment into the market on a regular consistent basis).

Remember, it’s not ‘timing the market’…it is your ‘time in the market’.

Maybe we are overconfident?

The other way investors get into strife is by being blinded by their own high convictions that may be too one sided. Over confidence often leads to a false sense of security which manifests in unnecessary risk taking in order to seek outsized returns. The basis for that conviction today might be sound, but the facts could change – and they often do!

The biggest issue is that the ‘average investor’ miscalculates the risk within their portfolio. For most of us, the word ‘risk’ means to expose oneself to danger, harm, or loss. In finance, however, risk is typically defined by volatility (market) or business specific (profit) exposure.

While both risks will always exist when investing, these risks are easy to dial up or down and can quickly be mitigated through proper diversification. Professional investors know that you rarely get paid – dollar for dollar – taking on these two risks. They just aren’t ‘good value’.

The three most common mistakes we often see are:

  • Lack of geographical diversification (all local, no global)
  • Lack of diversification across industries and sectors (i.e. all one industry)
  • Lack of security diversification (i.e. excessively large stock bets)

Or maybe it’s a bad case of FOMO?

‘FOMO’ or ‘Fear Of Missing Out’ is the fear that everyone is making more money than you, causing investors to herd into the same investment fads. Sometimes it can be the opposite, where we see market volatility and interpret everyone else is exiting and somehow we ‘never got the memo’!

Either way, this perceived fear of not having the same information everyone else has can lead us to make poorly calculated decisions that are not in our best interests.

It is at the extremes of market volatility (both euphoric and panic) we must circle back to our fundamentals.

  • Are my individual investments properly diversified?
  • Do I have the appropriate asset class exposure to meet my long-term objectives?
  • Is the underlying quality of what I own high enough to withstand what is happening?

At Stellan Capital, most investors fall into one of three optimal risk profiles. As long as the appropriate balance between growth and defensive strategies have been applied, there should never be a market-related reason to change between them. In fact, the only reason to change your risk profile should be based on your personal circumstances.

Maintaining this discipline gives both adviser and client sufficient confidence to ride any wave – no matter what the markets throw at us.


This article contains information of a general nature only and does not take your personal circumstances into account. Please read our disclaimer which directs you to seek independent professional advice before making any decisions based on information in this article.