“for the average individual investor to have access to the same talent/resources would cost more then we can add in value for the size of our portfolios”

Yep. That’s pretty much my thought process here. Well said.

As to the topic of most mutual funds underperforming the market: It’s my understanding that funds tend (on average, and over the long-term) to underperform by an amount roughly equal to their expense ratio.

Or to phrase it differently: Before considering expenses, funds tend (on average) to roughly match the market’s return. As such, I’m not sure how much “profit is left on the table.” (Except for the fund managers themselves, of course. )

Granted, the only data I’ve seen on this recently is from the two John Bogle books I’ve read in the last couple months. So perhaps not the most unbiased source of information.

That’s a good point. So maybe that goes back to the “after expenses” part. That maybe you can assume those big institutional investors can over perform the market (due to size and talent), maybe even individual M.B.A.’s but for the average individual investor to have access to the same talent/resources would cost more then they can add in value for the size of our portfolios?

Also is a mutual fund considered to be an institutional investor (since as a whole it could be controlling millions of dollars) that the average investor is competing against? Since most of them also fail to beat the market it seems like there are a lot of under performers leaving profit on the table for someone.

That’s a great question. Something I ponder rather frequently in fact.

After all, you’re absolutely right: If there are people underperforming, there must be people overperforming.

One thing I’d caution against, though, is the idea that for every person who underperforms, there must be a person who outperforms.

Instead, it’s for every dollar that underperforms, there must be a dollar that outperforms.

And with only 34% of equities owned by individual investors, most of the dollars we’re up against are managed by some pretty smart people.

William Bernstein (the author who wrote The Four Pillars of Investing) recently put it this way in Money magazine:

“Remember, when you venture into the markets, you’re competing against Warren Buffett, the giant Yale endowment fund, and a worldwide army of hypercompetitive M.B.A.s who wake up before you do and go to sleep later as well.”

And that is what has lead me to elect a passive investment strategy. Beating the market certainly isn’t impossible. I’ve simply chosen not to bet on it.

Yes when you add every investment and divide by investors then on average the market return is the average for everyone.

But if there are so many poor investors out there who under perform the market, people who try to time the market and fail, take on too much risk, buy the next hot stock/sector after it takes off, sell when there is a downturn, etc, etc. Basically just have a history of doing the wrong thing.

I think it’s safe to say on average that group will always under perform the average of the market. But doesn’t that mean if you *dont* follow those bad behaviors, or do something else that there should be a way to gain the return they give up? If not who gets it, professionally managed institution money?

The thing that comes to my mind for the average investor is the fundamental index concept, but I’m not sure. The problem is in theory it has an excellent track record of beating the index without adding risk. But in the short term reality the actual ETFs haven’t really shown over performance.

Curious if anyone has any thoughts on this?