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Andrew Hallam

How to Beat the Investment Returns of Almost Everyone You Know

Meg handed Jason a beer as they sat at an outside table. “If you could go back to 1993,” Meg asked, “would you do it?” It’s one of Meg’s favorite questions. Jason replied, “Meg, I would go back in a heartbeat if I knew everything I know today.”

“What stocks would you buy?” asked Meg.

Jason thought for a moment and said, “I would buy Home Depot.”

Meg smiled and asked, “Why not Apple?” If you invested $1000 in Apple back then, you would have about $344,000 today.” Jason’s eyes widened. “Wow, think of the people who did that! People who turned $1000 of Apple stock into $344,000!”

“Well…nah, nobody really did that,” said Meg.

“How could that be?” asked Jason. “Surely, plenty of people bought shares in Apple in 1993.”

Meg sipped her beer and thought for a moment. “That’s true,” she said, “but most of those people don’t own those shares today. In most cases, they sold them after they earned a decent profit, or, just as likely, they sold them after a loss. After all, if you invested $1000 in Apple shares in 1993, it would have plunged to $228 by the beginning of 1998. Over the past 28 years, most of the people who bought Apple’s shares did it after a big year’s gain, and many of them sold after declines. That’s human nature. That’s why almost nobody turned $1000 of Apple stock into $344,000.”

“Well,” Jason added, “if I went back in time, I would buy those shares and hold them. But you know… this topic is stupid because nobody can send me back to 1993.”

Meg sipped her beer, put it down and smiled. “There’s no such thing as a time machine,” she says, “but we can still learn from this. For example, did you know that the average mutual fund and ETF investor gave away about 18.3 percent of their portfolio’s value over the past ten years, without even knowing it?”

Jason thought he knew where this was going. “Yeah, yeah, Meg, you’re always saying high investment fees hurt performance. That’s why I only buy low-cost ETFs.”

“No, I’m talking about something potentially worse than investment fees,” Meg added. “Remember what I was saying about Apple? Almost nobody earns the posted returns of their investment funds because they speculate.”

Meg pulled her phone from her pocket to show Jason what she meant. “Look here,” she said. “According to Morningstar, over the past ten years the average investor in mutual funds and ETFs underperformed the funds they owned by about 1.7 percent per year. When compounded, that works out to 18.3 percent over ten years. And if that’s not bad enough, think of the long-term math. Over 55 years, that works out to 152 percent.”

Jason turned his head sideways and scrunched up his face. “What do you mean by that?” he asked.

“It means this: assume you built a diversified portfolio of mutual funds or ETFs. Assume you’re adding money every month, or at least trying to. During years when your funds don’t perform well, you might switch to better-performing funds. Or, even if you never do that, you might wonder about the best time to add money. You might keep some of your money in cash, from time to time, choosing to invest it when you think the time is right.”

“Hmm, I guess I have done some of those things,” said Jason.

“And that’s totally normal,” Meg added. “But that doesn’t make it good. That’s why the average investor underperforms the funds they own by about 1.7 percent per year. Now assume your neighbor, a brilliant woman named Meg, builds the same diversified portfolio that you started with. But she doesn’t mess with it. She adds money every month. If she inherits money or gets a bonus at work, she invests it right away. She doesn’t even think about the best ‘time’ to invest it. After 55 years, which might include working years and some retirement years, the beautiful Meg would have 152 percent more money than you.”

Jason finishes his drink, puts down the glass and then stares into the crowd of people. “So…this will happen to most of these people?” he says, drawing his hand in a sweeping motion. “Even if they buy low-cost funds, most of them will end up with half the money they deserve?”

“Sadly, that’s true,” Meg added. “It’s even worse for people who buy ‘sector equity’ funds.”

“What are they?”

“They’re funds that focus on a specific sector of stocks, like Cathie Wood’s ARK funds. Her funds, for example, include innovative, high-tech stocks. But most of the people that buy sector funds do it because they have high hopes that such funds will trounce the market. People often buy them on a high, after the funds have done well, and they often sell them after they have dropped. That’s why the average investor in Cathie Wood’s ARK funds, for example, hasn’t performed well. And according to Morningstar, the average investor in sector funds underperformed the posted returns of their funds by 3.95 percent annually over the past ten years. Overall, that’s 47 percent that they gave up over just ten years!”

“That’s incredible,” Jason said, looking a bit perplexed. “Does this mean most investors are better off with a financial advisor…a professional who won’t chase recent past performance?”

“I wish that were true,” laughed Meg. “Research suggests most financial advisors exhibit the same behavior as almost everyone else. They choose funds based on past performance records, and then they trade those funds for something else if they don’t perform well. That’s why, if you want a financial advisor, choose someone who will build you a portfolio of index funds or ETFs and stay the course.”

“So, if sector funds enhance crazy investment behavior, is there a fund category that encourages investors to behave?”

“Yeah, multi-asset class funds, like Vanguard’s Target Retirement funds, appear to thwart dumb behavior. Most of the investors in these products don’t try to predict which asset class or sector will soar this year or next. They simply own complete portfolios wrapped up into single funds. In most cases, the fund company rebalances the holdings to maintain a consistent allocation. Often, these investors don’t know or care what’s happening in the markets. When Morningstar analyzed investors’ performances versus their funds’ performances, those in multi-asset class funds (whether they were passively indexed or actively managed) behaved far better than the typical investor in mutual funds or ETFs.”

“Meg, does that mean the people in multi-asset class funds are the most experienced investors?”

“That’s a great question,” Meg replied. “I suspect plenty are new investors who just want something easy. But I believe others who buy these products are incredibly wise. They know they can’t see the future, and that there’s no such thing as a working time machine, so they accept what they don’t know and just keep things simple. In most cases, when they have money, they just invest it. They don’t have to worry about rebalancing or which funds to buy because everything is wrapped into one diversified product. And by sticking to a multi-asset class fund over their lifetime, they’ll beat the returns of almost everyone they know.”


Ten-Year Underperformance Based on Fund Class
Ending December 31, 2020

Category GroupAverage Annual After-Fee ReturnsAverage Investor ReturnsAnnual Compound Performance GapAnnual Compound Performance Gap Total Decade Performance Gap

Allocation (balanced funds, multi-asset class funds etc.)










International Equity





Municipal Bond





Sector Equity





Taxable Bond





U.S. Equity















Source: Morningstar, Mind the Gap 2021
A report on investor returns in the United States


Andrew Hallam is a Digital Nomad. He’s the author of the bestseller, Millionaire Teacher and Millionaire Expat: How To Build Wealth Living Overseas

Swissquote Bank Europe S.A. accepts no responsibility for the content of this report and makes no warranty as to its accuracy of completeness. This report is not intended to be financial advice, or a recommendation for any investment or investment strategy. The information is prepared for general information only, and as such, the specific needs, investment objectives or financial situation of any particular user have not been taken into consideration. Opinions expressed are those of the author, not Swissquote Bank Europe and Swissquote Bank Europe accepts no liability for any loss caused by the use of this information. This report contains information produced by a third party that has been remunerated by Swissquote Bank Europe.

Please note the value of investments can go down as well as up, and you may not get back all the money that you invest. Past performance is no guarantee of future results.

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