Abstract
Averages are highly misleading. They mask the concentrations of return in the investment business. However, returns are not evenly distributed to investors. This is not only because of differences in stock picking acumen, but also due to the way financial systems are designed to benefit a special class of investors to the detriment of others.
Stocks are rated on their one year and five year return. Mutual funds are also rated in this way. However, who or what group of investors receive the appreciation from assets is never discussed except in academic papers which have very lower readership. The powerful statement made for stock ownership is that “over the long term US equities have returned “x” percent per year, and have lead all other US financial instruments.” There are a number of problems with this statement. However, the deepest one is that it attempts to present the average return of the market as a return which is attainable for most people. However, returns on stocks are extremely variable mostly dependent upon the investor’s existing asset level. Since returns from assets are so unequally distributed, a stock or mutual fund that on average returns 10% in total, may return 15% to investors with over $500,000 in assets and 5% to those with under $30,000 in assets. This is referred to as a yield disparity. It is real and documented by Brooks Hamilton, a retirement specialist who researches the 401k industry.As discussed in the article Do You Have Enough Assets to Get “A” Advice, higher income groups have significant information advantages over other investors. If you look up “yield disparity” you will find very little on this subject, and it is largely an invisible issue to most the investing public. None of the large power centers in investing want the typical investor to know anything about it, and as they fund publications and television shows with advertising these outlets have very little incentive to bring this topic to investor’s attention. This disparity is also reinforced by the average mutual fund return which is explained in John Bogle’s testimony to congress (details here). The idea that keeps the 401k mutual fund industry, as well as the stock industry going, is that financial returns are “democratically” returned to investors regardless of their income level.
Where is the Data on Investor Returns?
The reason we have this data is because it was compiled by a benefits consultant specifically for 401k programs. However, this issue generalizes to the larger investing markets. According to John Bogle, at Vanguard
“from 1984 to 2002 when the stock market did a 12 percent annual return, the mutual fund industry credited 9 percent..The average investor according to [mutual fund data collector] DALBAR did 2.7 percent”
Furthermore, the use of averages in order to mislead the general public as to who is benefiting from an institution of law is not restricted to the stock market. As noted by Mark Weisbrot, from the Center for Economic Policy Research on how concentrated power formulates arguments in a different area of economics:
“But the “free-traders” always use averages, e.g. “the average household has gained $10,000 from free trade . . . .” Now if a hedge fund manager makes an extra billion dollars, it can raise the average income in his town or suburb quite a bit. But it doesn’t do much for others in the area; and in fact it is likely to be at the rest of the public’s expense.” – John Bogle
As with the gains from trade, the gains from the stock market are highly concentrated. However, as long as the institutions that benefit from this power concentration can focus attention on the average return, they can keep the public’s consciousness away from how those gains are distributed.
Conclusion
There little question that most investors lag the market. Furthermore the bulk of the returns are realized by monied investors leaving much less left over for average investors. The investment companies know all this as they maintain the largest databases on investor return. They won’t publish any research on this because it undermines their business model. The media is so controlled by these interests that they won’t even ask the question. To this date we have only seen PBS (through its program Frontline) delve into this subject.
