Why do people try to beat the market?
Barry Ritholtz interviews Burton Malkiel in this podcast. I'm a big fan of both, but felt uneasy when they seemed to chuckle at investors who seek consistent market-beating returns despite decades of evidence that such a feat is incredibly rare.
I don't subscribe to the idea that the markets are wise while investors are dummies. Knowledge of the returns you can expect is only a Google away. People wouldn't swing for the fences if they could live with hitting a few grounders.
Could average market returns then provide for the man on the street? More specifically, would it enable him a decent retirement?
Assumptions (US):
Let's throw Australia into the mix. Truth be told, I'm more familiar with the Australian data and retirement regime. I can adjust for things like home value and household size across different age ranges.
Assumptions (AU):
While the median household would have to achieve eye-popping returns of 24%-53%, doubling their net wealth every 3 years to 18 months, things look pretty good for the mean (average) household. The median S&P500 nominal return of 13% will do them just fine.
But average is the minority. Assuming uniform distribution across age ranges, you have to be in the top 25% of income and net wealth to be 'average'. Everyone else chases alpha perhaps not out of delusion or avarice, but because they have to.
Note: our beloved companion, friend, family member, and dog of 9 years died recently. So if you get a sense of hobbled limping on despite hopelessness from this post, well, that's where I am right now.
Barry Ritholtz interviews Burton Malkiel in this podcast. I'm a big fan of both, but felt uneasy when they seemed to chuckle at investors who seek consistent market-beating returns despite decades of evidence that such a feat is incredibly rare.
I don't subscribe to the idea that the markets are wise while investors are dummies. Knowledge of the returns you can expect is only a Google away. People wouldn't swing for the fences if they could live with hitting a few grounders.
Could average market returns then provide for the man on the street? More specifically, would it enable him a decent retirement?
Assumptions (US):
- Average residential house price: $262K,
- Savings Rate: 5.4%
- Safe Withdrawal Rate: 4%
- Retirement Age: 65
- Replacement Rate: 75%
| SCF 2013 | 35-44 y.o. | 45-54 | 55-64 |
|---|---|---|---|
| Median Income (USD '000) | 57.7 | 65.4 | 59 |
| Mean Income | 60.9 | 60.9 | 55.1 |
| Median Wealth | 46.7 | 105.3 | 165.9 |
| Mean Wealth | 347.2 | 530.1 | 798.4 |
| Years to Retirement | 25 | 15 | 5 |
| Return required for Median scenario | 16.68% | 20.64% | 53.50% |
| Return required for Mean Scenario | 6.28% | 7.12% | 10.48% |
Let's throw Australia into the mix. Truth be told, I'm more familiar with the Australian data and retirement regime. I can adjust for things like home value and household size across different age ranges.
Assumptions (AU):
- Comfortable Retirement: $640K (Couple)
- Savings Rate: 8.1% of net disposable income
- Superannuation contributions: 9.5%
| Households | 35-44 y.o. | 45-54 | 55-64 |
|---|---|---|---|
| Median Income (AUD) | 1992 | 2107 | 1557 |
| Mean Income | 2503 | 2650 | 2151 |
| Median Wealth (AUD '000) | 343.9 | 603.1 | 786.8 |
| Mean Wealth | 573.3 | 944.9 | 1239.7 |
| Years to Retirement | 25 | 15 | 5 |
| Return required for Median scenario | 52.72% | 22.15% | 24.12% |
| Return required for Mean Scenario | 13.63% | 7.81% | 1.69% |
While the median household would have to achieve eye-popping returns of 24%-53%, doubling their net wealth every 3 years to 18 months, things look pretty good for the mean (average) household. The median S&P500 nominal return of 13% will do them just fine.
But average is the minority. Assuming uniform distribution across age ranges, you have to be in the top 25% of income and net wealth to be 'average'. Everyone else chases alpha perhaps not out of delusion or avarice, but because they have to.
Note: our beloved companion, friend, family member, and dog of 9 years died recently. So if you get a sense of hobbled limping on despite hopelessness from this post, well, that's where I am right now.
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