Investing is important for you to grow your wealth towards a long-term goal. This can be for your young children’s education in one to two decades or your retirement in three to four decades.
As an investor, you naturally want to earn as high a return as possible. However, you must understand that along with high returns comes high risk. This is why some people may prefer to seek out average returns, which can also be referred to as market returns.
Investing to receive the average returns comes with lots of other benefits, such as being able to achieve broad diversification to the largest and strongest companies in the market with just a single investment, being able to start investing from a small amount of money, and not requiring a lot of effort or knowledge to get started and more.
What does the average returns look like?
Over the last 10-year period, the average returns of the S&P 500 index – comprising over 500 of the largest and strongest companies in the USA, and with broad geographical exposure globally – was 13.6% per annum.
This means a $10,000 investment in 2010 should have grown more than 3.5 times to $35,800 today. However, you may notice that not many retail investors around you would be able to boast such results in the stock markets.
What does the average investor end up earning?
According to Dalbar’s Quantitative Analysis of Investor Behaviour (QAIB), which has been analysing investor returns since 1994, “the average investor earns much less than market indices would suggest”.
For example, in 2018, the average investor lost 9.42% in the market while the S&P 500 delivered a return of -4.38%. This means the average investor had a return that was more than 5% worse than the index.
In another Morningstar Mind the Gap 2020 report, the average investor was found to consistently earn 1% per annum lower than international equity funds over a 10-year period.
These reports just highlight the fact that the average investor rarely receives the average return. This can be put down to several things.
How can you can avoid this fate?
As an average investor, you likely do not have the investment expertise or knowledge to go out in the financial markets to start picking stocks on your own. This means investing in broad country or regional ETFs – which seek to replicate the S&P 500 returns or other global indexes – will give you the best chance to capture average returns in the market.
Even after investing in broad investments, there is no guarantee that you end up earning the market or average returns. Here are some other things you can do:
1. Don’t invest based on emotions
It can be tempting to invest when you read articles online that stock prices are soaring everyday or after listening to your friends boast about their returns from the stock market. Having FOMO on potential stock market returns can often lead to poor investment decisions.
Similarly, when stock markets are crashing and everyone around you is pessimistic, you may be frightened into selling your investments. Again, trading based on your emotions will often lead to poor decisions. As you would have noticed, stocks today have already rebounded since the crash earlier in the year.
2. Stop saying you’ll invest when you have more money or when the market crashes
Many investors also procrastinate starting their investment journey. It can seem intimidating to make your first investment, but everyone has to start somewhere. It can also be good to speak to a friend or professional financial consultants to guide you to start.
For those that are already invested, you may hold back investing after seeing the markets go up. However, that’s just how the markets work – as mentioned, over the last 10-year period, the markets have gone up 13.6% each year. Waiting for a crash can be futile, especially as you may become fearful and not invest either. You can just ask yourself whether you invested heavily during the close to 30% market crash during the February to March 2020 window.
3. Do nothing (differently)
Regardless of whether markets are soaring or crashing, you should stick to your investment strategy. This is especially because you’ve already decided to invest in the broad market to earn the average returns.
While the S&P 500 has delivered a return of 13.6% per annum, it does not do so consistently. In some years, the return can be negative and in other years, the return can be over 20%. As retail investors, you will not be able to predict or make a good judgement call on when to invest or divest – hence, just holding on to an investment fund that is broadly exposed to the market returns could be a good strategy.
If you are investing regularly, you should not change your strategy to invest more or less or stop based on emotions during good and bad times. The idea is to be consistent, not emotional.
Of course, you can choose to invest more or even less or stop investing if you lost your job or need the money very urgently. But these are reasons unrelated to your emotions of where the markets are headed.
To help you on your investment journey, you can consider using the Autumn app which gives you a holistic view of your investment portfolio. Being able to see all your holdings in one place, it gives you the clarity and confidence to make better decisions regarding your investments.
Join our waitlist – http://www.autumn.sg
* The information in this article is not intended to be and does not constitute financial advice, investment advice, trading advice, or recommendation of any sort offered or endorsed by Autumn.