Dalbar, Inc., a leading market research firm, studies investor behavior each year and calculates the performance of average stock and bond investors versus the returns of the major market indexes. Over the 20 years ended 2012, the S&P 500 Index delivered an annualized return of 8.21%, whereas the average investor in stock mutual funds earned only 4.25% annualized over the same period.
You read that right. Due largely to jumping in and out of the market at bad times, and chasing the latest "hot" funds, the average stock mutual fund investor made only about half of what the market delivered. For bond mutual fund investors, the results are even worse over the last 20 years.
Today we’ll look at the latest Dalbar studies which were released in April and show us – once again – that most investors are still their own worst enemy. Dalbar argues that stock and bond investors should stick to a strict “buy-and-hold” strategy and should never get out. We, on the other hand, have long argued that most investors don’t have the temperament to hang on during bear markets and are very likely to bail out at the worst times.
I write about the Dalbar studies every couple of years, and the results are always the same. Average investors in mutual funds significantly under-perform the major market indexes. As we go along today, you’ll see the reasons why the study’s results are so consistent and why Dalbar’s recommended solution hasn’t changed investor behavior in over 20 years. Let’s get started.