Over the past 20 years investors in stock mutual funds have underperformed the S&P500 by 6.5% a year. (8.35% vs. 1.37%.) That return doesn’t even keep up with inflation.
They did even worse in bonds, underperforming the Barclay’s Aggregate by 6.7% a year. (7.43% vs. 0.77%.)
From the annual Dalbar study:
“The dramatic events that continue to plague our financial markets have provoked panic, which exacerbates the ongoing carnage,” said Lou Harvey, president of DALBAR. “For 15 years, QAIB has shown that investor returns lag what performance reports and prospectuses would lead one to believe is achievable. While those returns are, in fact, theoretically achievable, the reality is that investors are not rational, and make buy and sell decisions at the worst possible moments,” he said.
Among the studies findings:
- For the 20 years ended December 31, 2008, equity, fixed income and asset allocation fund investors had average annual returns of 1.87%, 0.77% and 1.67%, respectively. The inflation rate averaged 2.89% over that same time period.
- Equity fund investors lost 41.6% last year, compared with 37.7% for the S&P 500 Index.
- Bond fund investors lost 11.7% last year, versus a gain of 5.2% for the Barclays Aggregate Bond Index. This disparity is largely due to the underperformance of managed bond funds caused by mortgage-backed securities.
- With an annual loss of 30% last year, asset allocation fund investors fared better than equity fund investors.
I told this information to a business networking group today. Everyone had confused looks on their faces. What about the 10% average return my stockbroker told me about. Or how well my mutual fund did over the last 10. Most investors unfortunately will never learn. I think people like to get sold stuff. They like the stories they're told.
Excellent information in this study. The behavioral finance stuff is fascinating but I wish somebody would address the theoretical impact that a mass behavioral change would have. If everybody started investing “correctly” they would not start magically outperforming, or even keeping pace with the market beta. The definition of “correct” would simply change. Mathematically speaking, most participants have to underperform the beta, especially after fees, slippage, taxes, overhead, etc. The tone of behavioral finance seems to be that you can somehow change the aggregate return to investors by changing their behavior. I don't think that's true. There's a certain amount of risk to be transferred and a certain amount of premium to be collected. Changing the behavior of the risk takers doesn't alter the finite nature of what's available. Advise on investing can only alter the outcome by favoring some risk takers over others.
Keep in mind that mutual fund investors don't make up the whole market, there are also other players. It would theoretically possible to bring fund investor's returns closer to parity with institutional investors through some type of behavioral lobotomy.
Also it seems like more effective and less fickle capital market participants would lower the cost of capital, lower risk, and increase the growth of the economy. It just seems like it would be great for the economy if retail investors would invest for the long term in companies that could be the next Apple, instead of losing money on zero sum bets with regard to the direction of AAPL tomorrow.
Keep in mind that mutual fund investors don't make up the whole market, there are also other players. It would theoretically possible to bring fund investor's returns closer to parity with institutional investors through some type of behavioral lobotomy.
Also it seems like more effective and less fickle capital market participants would lower the cost of capital, lower risk, and increase the growth of the economy. It just seems like it would be great for the economy if retail investors would invest for the long term in companies that could be the next Apple, instead of losing money on zero sum bets with regard to the direction of AAPL tomorrow.