What one data point can replace an entire collection of data points? This was the genesis of “the average”. It began with Astronomy in trying to find the distance between planets by means of estimation to save time and effort and then it spread to other disciplines. The idea that positive errors in value balanced out negative ones became widely accepted. Working with a normal distribution of values in war and in food planning averages gave a representative number that was a good way to ballpark when planning. However, like a lot of statistics averages tend to oversimplify things, just ask the statistician who tried to walk across the river he calculated to be “on average” 3 feet deep. Oh yeah, he didn’t make it...so the story goes.

Averages ignore the impact of inevitable variations, hence why Probability Management is now an important career in many firms and in many sectors of our economy. Averages are often low resolution snapshots of reality. This holds true even with things that aren’t very complex. I worked at a Paint Store in high school. It would be dead for hours before suddenly an onslaught of random customers came flying through the door at seemingly all different hours of the day. There wasn’t a unified pattern to it. I'd frantically hammer on a bunch of paint can lids with a rubber mallet, check them out and then it would be dead again till the next wave of people burst through the door.

The reality is, averages have been shown to be useful when measuring a diverse set of data points to show changes over time, but elsewhere, they have numerous flaws. Notably, the whole idea of “average” gives the impression of “typical” and that in itself, is misleading. As an example I’ve only personally known a few people in my life that can dunk a basketball but there is an entire league called the NBA, and even certain schoolyard courts in our cities where dunking a basketball is commonplace. Averages remove outliers, and especially when it comes to disciplines where being “average” is sometimes the goal, they distort our measure of talent and success. This brings me to capital markets and financial advisors. Recent studies have been completed showing “advisor alpha” and how much value the “average” advisor is able to bring to investors. The numbers are always quite positive and that’s great, but there are far more benefits for an investor, business owner or an entire family’s long term wealth and health than just returns. I’ll save that for another write-up though, and stick to portfolio construction and investment quality. Like any discipline whether it be sports, chess, custom home building, or bioscience there are always those that excel beyond the median and the same goes for an active money manager whether they are managing a mutual fund or an individual portfolio. Through the years I’ve worked with many investment advisors. I would say on “average” most had great personalities, but amongst them there were exceptional ones when it came to managing money. People who helped investors retire years earlier than they thought they would, and from them I built my investment discipline.

Conversely, on the study front there are always studies showing how well passive investing does versus the “average” mutual fund. Though passive investing has an important place in portfolios especially at certain times in the market cycle, comparing passive indexes to "the average" mutual fund is almost pointless both empirically and theoretically unless you're using a limitless time frame. There are numerous mutual fund managers who have added value far above their benchmark index and done an exceptional job of navigating markets for decades. These Portfolio Managers are anything but average. Some of the best in the world are domiciled right here in Canada.

What's cogent in all this? As an investor, there is a LOT of noise, misleading advertising, and misconceptions about what good portfolio management is out there. So how do you know if your portfolio and plan is suitable and high quality? Your advisor is, of course, going to tell you it is, but how do you truly know? Well, sometimes it’s wise to seek a qualified second opinion. From a scientific perspective, whoever provides that second opinion should have a quantitative process for measuring this that's similar to what pension and institutional investors. On the "art" side, if we can call it that, a credible analysis of your portfolio should also reveal how well your advisor captured or missed market trends. If they missed the significant upside of the technological revolution we've been in the midst of, what might they miss next? How biased is your portfolio to certain outcomes? Most importantly, how well does your portfolio align with your personal goals and timelines? These are some of the questions that need answering because they can materially effect when you retire, the quality of your retirement, and what's potentially left for your heirs.

If charm, tenure, and/or slick marketing make up most of the criteria you've used to benchmark the quality of your investment advisor, you're doing yourself a disservice. You're relying largely on luck to get anything more than “average” from your hard earned dollars, You’ll likely be lucky to even do that. And, you may be paying more for it.