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Disappointing returns

I read this tidbit in the Boston Globe this past weekend:

“Dalbar Inc., a Boston-based financial services research firm, has been measuring the effects of investors’ decisions to buy, sell, and switch into and out of mutual funds since 1984. The key finding always has been that the average investor earns significantly less than the return reported by their funds. (For the 20 years ended Dec. 31, 2006, the average stock fund investor earned a paltry 4.3 average annual compounded return compared to 11.8 percent for the Standard & Poor’s 500 index.)” and it helped to reinforce my belief in “Buy and Hold” and “Don’t Panic“. There are the never ending debates on managed funds vs. index funds, and how much to pay an advisor, but when the data show that the average investor has actually lagged the market by 7.5% per year, something is terribly wrong. In these 20 years, $10,000 in the S&P would increase to $93,075. Investing in a low cost (I use a cost of .18% for this math) fund would yield $90,124. But the average investor has seen his $10K grow to only $42,478.

  • Augustine February 13, 2008, 2:32 pm

    Well, one could also suggest that for the last 20 years, low-cost brokerage firms and the almost real-time information coming through the Internet has been a reality for less than 10 years. I’d even venture suggesting that such low return before the Internet could also be due to conflict of interest between the brokers and the small investors, anecdotally being used to dump junk stocks from large investors…

  • JOE February 13, 2008, 8:40 pm

    You could suggest that, it’s a valid hypothesis. It’s interesting to note that the article I cited did not go very deep into the cause of the disparity. I assumed it was the small investor tendency to buy high and sell low.
    Thanks again for visiting.

  • Dave Shafer May 23, 2008, 9:41 am

    You are onto something. Studies demonstrate that do-it-yourselfers actually out perform those that get advice from financial advisors. But, I believe demography and fear also play a part. As the baby boomers reach retirement age, many move their investments to safer places than the equity market. This movement would would take out many people who would panic when the market moves down. Also 2001-2003 scared many people out of the market and kept many people from entering it that would be skittish. There quanitative approach would benefit from some qualitative analysis of behavior.

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