For many years, decades really, I thought that investing success was about picking the right stock or fund, ones that would outperform others, thus growing my money faster. It’s a belief that many investors hold, trying to outsmart the other not-so-smart investors. One might approach selecting a fund by looking at recent performance - selecting the recent top performers, the “momentum trade” as it’s called, or, being a “contrarian”, buying investments that have been lagging others, because they must be due for a turnaround. Thus, many will select riskier investments without understanding the ramifications of the market average on their investment choices. For me, the light bulb went off when I read “The Little Book of Common Sense Investing” by John Bogle, founder of the Vanguard Group. Specifically, his observation that the market return is the average return that all investors together receive.

As you think about the observation, of course, it makes sense. The average is the average of all data points; in this case, all investors and all investments. For someone to “beat the market,” someone else has to lose. While some will be above average and others below at this point, taken together, they are average. Next year, their positions might flip, but the average is still the average.

When it comes to numbers, our minds will play tricks on us. Is a 5% return losing money when the average return is 9%? How about -2% when the average is 2%? Both are 4% apart, and the lower number represents a loss relative to the average, but our minds tell us that -2% is losing money while 5% is not. In fact, most investors would look at the 5% return and think, “It’s not great, but at least I didn’t lose money.” But they did. They could have sought out average returns and then not done worse than average.

Next, investors can easily be fooled by “recency bias,” or by looking at a trend or recent performance and thinking it will continue (or that the opposite will happen, as the contrarian says). Again, it’s easy to fool yourself into thinking stocks “always” go up by 10% a year because they’ve done that for 3 years in a row. This is similar to being fooled by the “gambler’s fallacy,” or thinking a recent string of good luck will continue, or that we’re due to hit because we lost 10 times in a row. But the truth is, not all investments can be winners all the time. For every winner, there has to be a loser or someone who gained less. In other words, if the market average is 9% annually, some funds will increase by 12% some years, while others will return only 6%. These above- or below-average returns can occur once, or several years in a row, but over the long run, they will average out to the market average. The large stocks, the small stocks, the stocks of poor companies that don’t turn a profit, and the companies that rise spectacularly and then crash - all of them together make up the market average. So, if you buy the premise that some investments you purchase will be winners and some will be losers, and you don’t and can’t know why, then the market average observation starts to make sense.

Now, this doesn’t mean that tech stocks will fall back below market averages to make up for many years above average. As a sector of the total market, with both large and small innovative companies, it’s likely to outperform the market average over long periods, while more established, stable businesses like utilities will usually perform at or below the market average. The difference in returns between these types of businesses reflects the earnings (i.e., profits) of tech companies vs. utilities. But history shows that long, higher-than-average streaks cannot keep going higher.

The investor could also trade back and forth between the 12% and 6% fund, hoping that timing the purchases could even increase returns. Again, fooled that they can perform the transactions at the right time (actually, twice in a row - timing a sale when high and timing a purchase when low). In all cases, they forgot that the market average will be the average of all the 6% and 12% funds (and all the others) at the end of the year. It will include the good years for tech stocks and utilities, as well as the bad.

The fact that some investors beat the market for long stretches doesn’t mean they are better; they could have done so with inside information or simply been lucky. And then there are the hot trends or companies that one buys early and holds for the long term, reaping massive returns. Just as likely, they might also have bought and sold many duds that must be subtracted from their other successes. Long-term investing returns will come from corporate profits, not speculation, which adds volatility that all investors must get comfortable with. So, the individual investor can invest for market-average returns at low expenses (i.e., buying a Total Stock Market Index ETF, a Wilshire 5000 Index ETF, or an S&P 500 Index plus an Extended Market Index fund) and hold them for the long term to achieve market-average returns. Besides this approach with stocks, the same can be done with bonds, capturing the broad bond market at a low cost. As John Bogle points out, owning the entire market at low cost is the way to guarantee your fair share of stock market returns.

For us, average individual investors looking to pay our bills, secure a retirement, and afford old age, average is good enough. By investing to achieve the average return, you will have outpaced inflation by a few percentage points, compounding your account balances. And if you outpace inflation by a few percent over decades, you will have financial security. If you fall short due to poor investment decisions, that’s on you, because the market average would have provided enough.