Average. The word is supposed to conjure up a midpoint, of sorts (yes, yes, statistics nerds, that's officially the "median"). The average, or mean, is the result you'd get if you mashed up all of the data and divided it up evenly.
But in our mutual drive for the next superlative, being average isn't enough any more. Indeed, describing something as average is akin to a putdown these days. When something is "decidedly average", it's below par … disappointing.
![If you're trying to be "smarter than average", like Yogi Bear, it won't be a smooth ride.](/web/20170308101422im_/http://www.theage.com.au/content/dam/images/g/u/m/7/0/o/image.related.articleLeadwide.620x349.gum6ya.png/1488167586412.jpg)
But the average has a lot to offer – and to teach us – especially if we're investors.
That very concept is behind one of the greatest changes to investing over the past few decades – the rise of the passive index fund.
Once upon a time, you (or your broker) chose a portfolio of stocks in the hope that your portfolio would make you money. And the more ambitious investors wanted to be able to benchmark themselves (plus, the newspapers wanted a way to "score" the stock market). The index was born.
Our version, the ASX 200, tracks the aggregate performance of the market, telling investors how the total value of the market changes over a day, week, month or year. And it tends to increase by about 10 per cent a year, over the long-term.
But those are averages. The average company. The average year. Now, if you simply buy an index-tracking fund, which many investors should do, that's perfectly fine. You'll get the average return (less a little bit for fees), and over a long enough timeframe, that's likely to generate plenty of real wealth.
But not every year will go up by 10 per cent. And not every company will increase in value by that same 10 per cent. Companies go broke. Companies discover "the next [insert hyped product here]". Some harness the potential of their product and market, to deliver years of market-thrashing gains (check out the Domino's share price if you don't believe me), while yet others have gone almost nowhere in a decade (I'm looking at you, Westfield).
Some years, the market falls precipitously. The global financial crisis isn't that long ago, and the market fell by more than half between late 2007 and early 2009. And that, after it had more than doubled between 2003 and 2007.
The concept of "average" paints a nice, gentle steadily improving scenario. Which is far from true. But that doesn't mean you should eschew it – after all, 10 per cent a year for 30 years, would turn $100,000 into $1.74 million.
And the same applies to property. The prices that get quoted are national averages – including white-hot inner Sydney and struggling Darwin and Perth – or at the very least city-level averages, incorporating inner city apartments, harbourside mansions and suburban developments, among everything else that's bought and sold in a year.
And in the cases of both property and shares, the numbers quoted only capture those assets that actually changed hands – not the vast majority of shares that were left in a bottom drawer or houses that their owners happily continued to live in.
Foolish takeaway
Blindly following anything is a bad strategy – and to go back to our boffins earlier, the median point (literally the point at which half of the data is below and above) tells us something else entirely. Beating the average takes skill and not just a little bit of luck. If you can find a way to "buy" the average – such as by using an index fund – that's a smart approach. If you're going to attempt to beat it, make sure you know what you're in for – and that it won't be a smooth ride, either way.
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Scott Phillips is the Motley Fool's director of research. He owns shares of Westfield. You can follow Scott on Twitter @TMFScottP. The Motley Fool's purpose is to educate, amuse and enrich investors.