Most people fall in the so-called “average” or “median” range. After all things are counted and considered, the statistical middle-ground is where all things tend to gravitate – the world of the, sorry for the term: mediocre.
To be honest, no one wants to be mediocre, run-of-the-mill or commonplace. People in the city park may take selfies that are quite ordinary compared to people who challenge the heights of the Nepalese mountains or the Alaskan wilderness. People do not just want a few likes but viral likes, so it seems. We want to be among those who make an impression for being extraordinary. And that takes a lot of effort to achieve and sustain.
But as investors, the average can provide a lot of benefits.
The idea of being average is the very foundation of the biggest changes to investing in recent years – the surge of the passive index fund.
In the past, you (or a broker) selected a portfolio of stocks that has the potential to bring you wealth. The more adventurous investors opted for a chance to benchmark themselves (while the newspapers aimed for a chance to “score” the stock market). That gave birth to the index.
One possible choice is the ASX 200, which tracks the overall market performance, giving investors a view on how the total market value shifts in a day, a week, a month or a year. It is expected to rise by about 10% yearly, within a long-term period.
And, obviously, we are talking of averages — the average firm and the average year. Choosing to buy an index-tracking fund, as investors usually do as a rule, is quite alright. You can expect to gain average return (minus some fees) over a long duration, enough to produce a sizeable profit in the end.
However, do not expect to get 10% yearly. Moreover, not all firms will gain a value growth by such an amount. Some can go broke. Others come up with the latest “hot product”. Some may exploit the advantages of their product and market, to offer years of market-crunching returns (for instance, Domino’s share price). And there are also those that remain stagnant for ten years (check out Westfield).
The market can spiral downward sometimes. We all know how the last global financial meltdown brought the market down by over half its value from late 2007 to early 2009. That occurred after it had doubled in value from 2003 to 2007.
The idea of “average” provides a restful, promising relief for investors, which may not be absolutely true. Nevertheless, that is no reason to avoid it; for a 10% annual return across 30 years will convert an investment of $100,000 into $1.74 million.
So it is with real estate properties — the quoted prices are national averages, which include stellar Sydney and lagging Perth and Darwin. At the very least, they are city-level average prices, such as those of inner- city apartments, harbourside mansions and suburban residential projects, everything that is traded in the market in a year.
Furthermore, for both assets and real property, the quoted prices reflect only those that actually moved from one hand to another and not the bulk of assets that were kept in a private safe or properties still in use by their happy owners.
Although it is not wise to be foolhardy, the average point (where half of the data is either above or below) presents a totally different picture. You need more than luck to get over the average-trap. Hence, if you can succeed in “buying” the average – that is, by using an index fund – you made the right initial step. Just remember that it will require big challenges along the way, whether you do buy or not.