Are You Getting the Full Return Offered by the Markets?
By Ric Edelman
If you're not, it's your fault
Despite their claims to the contrary, the vast majority of investors engage in market timing — and their results are disastrous.
That’s the conclusion of the 2010 study “Quantitative Analysis of Investor Behavior,” produced by financial research firm Dalbar.*
Although there are many studies that examine investment performance, Dalbar goes an important step further: It examines what happens to the people who buy those investments. And it has found that there is a big difference between investment returns and investor returns.
Mutual fund performance data are based on arbitrary start-and-stop dates — typically January 1 of a given year and December 31 of that or some subsequent year. But Dalbar realizes, as I’m sure you do, that consumers don’t limit themselves to buying on January 1 and selling on December 31. Instead, their transactions occur at other times throughout the year — they buy investments when they have the money and sell when they need (or want) to sell. And because investment values fluctuate from day to day, the results differ from those who buy on January 1 and sell on December 31.
So sure, your investment results would be identical to those reported by your mutual fund — if you owned all your shares at the beginning of the fund’s reporting period and sold them at the end of the period. But if you open your account at a different time, add or withdraw money during the period, or sell the entire account, your returns will be dramatically different.
It’s like when the U.S. Census Bureau says the average American family has 1.86 children. Nobody really does; it’s just a benchmark, and it doesn’t really reflect anyone’s true situation.
So how different are investor returns from investment returns? Huge. While the S&P 500 Stock Index** returned an average of 8.2% per year during the 20-year period ending December 31, 2009, the average investor who invested in stock mutual funds earned only 3.2% per year, or 61% less.
Dalbar was able to figure this out by examining cash flows — the movement of investor money into and out of stock mutual funds over the past 20 years. As Dalbar’s data clearly show, investors consistently buy investments when prices are relatively high, and they consistently sell their shares when prices are relatively low. The sad result: Over the past 20 years, the average investor has earned only about one-third of the returns that the funds themselves produced!
Buying high and selling low is, of course, the exact opposite of what you’re supposed to do. As Dalbar shows, it’s easy to obtain the full return that investments offer: You simply need to be invested throughout the entire time period.
Invest, and stay invested.
* This 2010 study was conducted by an independent third party, DALBAR, Inc, a research firm specializing in financial services not associated with Edelman Financial Services LLC.
** An Index is a portfolio of specific securities (common examples are the S&P, DJIA, NASDAQ), the performance of which is often used as a benchmark in judging the relative performance of certain asset classes. Indexes are unmanaged portfolios and investors cannot invest directly in an index. Past performance does not guarantee future results. Neither the information in this document nor any opinion expressed herein constitutes an offer to sell or solicit any person to purchase any security. Investment decisions should not be made based on information in this document, individuals should rely exclusively on the offering material when considering whether to invest.