Fred Schwed’s classic Where Are the Customers’ Yachts: or A Good Hard Look at Wall Street (Wiley Investment Classics) asks the perennially relevant question when it comes to investment advice. A 21st century corollary might inquire: Where are the customer’s returns? More precisely, why do the customer’s returns so often trail the benchmarks?
There are many answers, of course, ranging from high fees to poor decisions to thinking that beating the market is easy. Whatever the reason, it’s no secret that the average investor needs help in earning a decent rate of return on his investments. It all looks easy from the vantage of history, but real-world results tend suggest otherwise.

This is hardly news, but it’s an ongoing feature in the struggle to make a buck in the capital markets. The latest smoking gun comes by way of Morningstar, which calculates asset-weighted investor returns. This study reflects what the average investor actually earned in various mutual fund categories vs. the average for the respective fund category. Unsurprisingly, the average investor tends to earn less than the average fund. Consider a few examples from Morningstar’s latest tally:
● The average investor in U.S equity funds earned 0.22% for the 10 years through the end of 2009, well below the 1.59% gain for the average fund in this category.
● For international equity funds, the average investor earned 2.64% vs. 3.15% for the average international stock fund for the decade through this past December 31.
Is it any wonder, then, that 401(k) investors can benefit from professional advice? This says as much about the quality of the advice as it does the poor investing decisions that so often pass as standard operating procedure for the man in the street. Yes, we must be careful of “advice,” which can sometimes be a cure that’s worse than the afflication. But simple recommendations, such as embracing broad-minded asset allocation, can do wonders for investors who are clueless as the to basics.
On that note, consider a study published last month by Hewitt Associates and Financial Engines that 401(k) participants who availed themselves of target-date funds, managed accounts and/or online advice earned higher returns—i.e., “help.” The study—“Help in Defined Contribution Plans: Is It Working and for Whom?”—advises: “On average, the median annual return for Help Particpants was almost 2% (186 basis points) higher than for Non-Help Participants, net of fees.”
The research goes on to report that “non-help participants often have inappropriate risk levels and/or inefficient allocations, both of which can significantly affect portfolio performance.”
No one should be surprised by any of this, although one can only guess how much of these types of studies promote thinking and investing strategically. The good news: the basic building blocks of shifting the investment odds in your favor isn’t rocket science. Owning multiple asset classes and engaging in some simple rebalancing from time to time offers a surprisingly durable risk-reward profile over time, as we’ve discussed. But what’s easy and obvious (at least to some) in the money game is rarely embraced by the masses. Documenting the supporting evidence is fairly uncomplicated. Explaining why this is so is something else altogether.