years, but the median is
The following appeared in the March 28, 2000, issue of 87.
THE WALL STREET JOURNAL:
"If you want enough
money to make it to
death, you're going to
THERE ARE MANY WAYS have to plan for a higher
age than the mean," Mr.
TO PLAY THE AVERAGES Huff says. But even the
median life expectancy
should only be a starting
point, he adds, because
BY JONATHAN CLEMENTS half of all people will live
If you want to understand ly high or unusually low
why most folks live longer numbers.
than the life-expectancy "If you look at the aggre-
But this stuff isn't just for
tables suggest, why the gate data, households
kids. The mean and medi-
typical family doesn't give have more invested in
an diverge all the time —
a hoot about stocks and stocks than in real estate,"
sometimes with intriguing
why most portfolio man- says Joseph Tracy, a vice
agers fail to beat the mar- president at the Federal
One Life to Live Reserve Bank of New
ket, cast your mind back
to grade school. How long will you live? York. "But when you look
Consider some statistics at the typical household,
You might recall learning
from William Huff, an ac- they have very little in
that there was more than
tuary at Seattle insurer stocks and much more in
one way to calculate an
Safeco Corp. According to real estate."
average. Most times, you
one of Safeco's life- The reason: Stock owner-
add up all the observa-
expectancy tables, the av- ship is concentrated in the
tions, divide by the num-
erage male life expectancy hands of the wealthy. As
ber of observations and
is 80.1 years. of 1995, median house-
get the "mean."
But this average is a mean, holds — those halfway
But as your math teacher
which gets dragged down down the wealth spec-
no doubt explained, occa-
by folks who die young trum — had 66% of total
sionally it makes more
because of accidents and assets in real estate and
sense to use the "median,"
disease. What if you aren't nothing in stocks.
which you get by arraying
so unfortunate? You may Haves and Have Nots
the observations from
want to take your cue
highest to lowest and then Based on U.S. Census Bu-
from the median, which is
picking the one in the reau data, the mean
83 years. Half of men will
middle. That way, you get household income was
die by this age and half af-
an average that isn't $51,855 in 1998, but the
ter. Similarly, among
skewed by a few unusual- median was just $38,885.
women, the mean is 84.3
Meanwhile, according to (which is a weighted turned over 75% of their
the January 2000 Federal mean) tends to be driven stock portfolios each year,
Reserve Bulletin, the mean higher each year by a fist- as measured by the mean.
family net worth was ful of stocks that post But the median turnover
$282,500 in 1998, while the huge gains, so that the was just 32%, according to
median was $71,600. median stock lags behind the study, which will ap-
Why these big gaps? Be- the market. pear in the April issue of
cause the wealthiest have Result? Each year, you the Journal of Finance.
so much money and the end up with a minority of "Yes, the tremendous
highest earners garner money managers who turnover comes from a
such big incomes, it skews hold the year's hottest small group that trades a
the means upward, so that stocks and thus earn fabu- lot," says one of the
the means are much high- lous returns, while the study's authors, Terrance
er than the levels enjoyed rest miss out on the big Odean, a finance profes-
by the typical family. winners and therefore sor at the University of
This imbalance can be trail the index. California at Davis. "But
seen in federal tax returns, The solution is to diversi- even the average person
says Frank Levy, a profes- fy even more. "The more appears to be trading
sor of urban economics at names you hold, the more than they did five
Massachusetts Institute of greater the probability years ago."
Technology. The top 0.3% that you'll hold some of
of tax returns, he notes, the big winners and so
accounts for some 12% of your returns will at least
all adjusted gross income. keep up the market," says
David Ikenberry, a finance
professor at Rice Universi-
ty's Jones Graduate School
of Management in Hou-
Recent statistics suggest
Missing the Boat that folks are buying and
Most years, a majority of selling stocks like crazy.
portfolio managers trail But it turns out that this
the market. A big reason trading frenzy is largely
is the drag from invest- confined to a small group
ment costs, including of investors.
management fees and For instance, according to
trading expenses. a study of trading through
But the pattern of stock re- a large discount-
turns also plays a role. brokerage firm over a six-
The market average year period, households