It’s enough to drive a 401(k) advisor insane.
An oft-repeated (and by now legendary) statistic from research firm Dalbar Inc. found that while the S&P 500 returned 12.2 percent annually in the roughly 20 years from 1984 through 2002, the average equity mutual fund investor earned a paltry 2.6 percent.
Market timing, performance chasing–call it what you will. But if the investing public behaves this badly in an unprecedented bull market, well … you can only imagine the havoc they will—and do—reap when markets aren’t quite so friendly.
Which is exactly what Dalbar continues to find. The firm’s 2016 Quantitative Analysis of Investor Behavior shows that the average investor earns less—in many cases, much less—than mutual fund performance reports would suggest. For instance:
- The average investor in asset allocation mutual funds (which spread your money among a variety of classes) earned 1.65 percent per year over the last three decades (coincidentally, inflation averaged 2.6 percent per year over this period.)
- The average investor in equity mutual funds averaged 3.66 percent per year—beating inflation by 1 percent per year. That was about two-thirds less than the return of the S&P 500 index over that period.
- People who invested in fixed-income funds eked out only a .59 percent annual return, significantly trailing inflation and getting only a tiny fraction of the return of the corresponding benchmark.
“If you’re investing in a tax-deferred account like a 401(k), IRA, or 403(b), you’re also paying hefty fees, and you’ll have to pay taxes when you start taking income,” says financial security expert Pamela Yellen author of “The Bank on Yourself Revolution: Fire Your Banker, Bypass Wall Street, and Take Control of Your Own Financial Future. “That can easily wipe out another 30-50 percent of the meager returns you managed to eke out.”
After decades of analyzing investor behavior in good times and bad, DALBAR concludes that, “Investor behavior is not simply buying and selling at the wrong time, it is the psychological traps, triggers and misconceptions that cause investors to act irrationally.”
These include loss aversion, optimism and copying the behavior of others even in the face of unfavorable outcomes.