Among my favourite misconceptions in finance and investing is the idea that average returns (market returns) are for average investors and that sophisticated investors are able to earn above market returns due to superior knowledge, skill or technology. This concept is promoted by TV shows such as Billions and the thousands of ads online from people offering untold wealth if you paid them to learn an arcane trading strategy.

Being a fan of market alchemists such as George Soros and Warren Buffett, I will never claim that there is simply no way to consistently beat the market over a long period of time. However, I can confidently say that even the most sophisticated investors will struggle to earn even average returns much less consistent above market returns.

Do not take my word for it, because somebody already did the math. A study by Dalbar, a research firm in Massachusetts, discovered that in the past 30 years, mutual fund investors have underperformed both the stock and bond markets. Bond investors have even failed to keep up with inflation. How about the super-rich investor? It turns out that hedge funds have underperformed the market for about a decade. This is despite them charging hefty management fees.

I did some math too. In a post back in February, I showed that the average return for a 5-year holding period of the GSE was over 230%. This translates to a compound annual growth rate (CAGR) of 18% per year. Now I am willing to bet that you will find very few investors that would have secured such a return over any 5-year holding period. In fact, 18% may sound very small to you, but it is very likely that most investors have not earned that rate over the past 5 years.

One of the phenomenon leading to this misconception that market returns are for losers is the tendency to focus on outliers. The very few investments that have proven to be ultra-profitable have been held up as the standard for every other investment, while the market return, which actually requires skill to replicate, has been held as simply a benchmark to measure performance by.

If this misconception dies, investors will be much better served. Instead of performance chasing, which has a significantly harmful effect on your returns, or paying people real cash in fees for returns that may not materialize, you can focus on getting the market return while working on other things that matter, such as increasing your income or saving up for the things you want to buy.