Each year Dalbar publishes their Quantitative Analysis of Investor Behavior, which analyzes the effects of investor decisions to buy, sell and switch into and out of mutual over short and long-term timeframes. The results consistently show that the average investor earns less – in many cases, much less – than the mutual fund performance reports would suggest.
For the 20-year period ending in Dec 2014, the average equity (stock) mutual fund investor earned 5.19% annually while the S&P 500 Index return 9.85%; a gap of 4.66%. The underperformance was even worse for bond funds. The average fixed income (bond) fund investor earned 1.16% during the 20-year period ending Dec 2014 and the Barclays Aggregate Bond Index returned 5.97% annually during the 20-year period; a gap of 4.81%.
The reasons for the underperformance by the average investor are numerous:
• Making decisions without considering all the implications
• Tendency to react to news without reasonable examination
• Thinking they can find high returns with low risk
• Relating to familiar experiences, even when inappropriate
• Taking undue risk in one area and avoiding risk in other areas
• Copying the behavior of others even in the face of unfavorable outcomes
• Treating errors of commission more seriously than errors of omission
• Believing subconsciously that good things happen to them and bad things will happen to others
Having a trusted advisor is the key to avoiding the psychological traps, triggers and misconceptions which cause irrational behavior and hinder a successful investment experience. To read the full Dalbar Study, click here: Dalbars 21st Annual Quantitative Analysis of Investor Behavior 2015 Advisor Addition.pdf.
Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail firstname.lastname@example.org.
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