Dalbar Finds Chasing Returns Causes Investors To Stumble
Eagerness to chase market returns continues to hurt mutual fund investors in their pocket books, says a new report from Dalbar Inc., a financial research firm in Boston.
Dalbar blames investors “fear and greed” for a self-destructive tendency to miss out on market upswings and sell too quickly on downturns. Failure to recognize the benefits of long-term investing is at the crux of the problem, Dalbar argues.
Average investor returns are at their lowest point since Dalbar began tracking this information in 1984, the company says.
It is no coincidence that the average length of time that investors retain a fund is also at its lowest point since 1988, the company believes.
“Most investors are unable to profitably time the market and are left with equity fund returns lower than inflation,” Dalbar concludes in its “Quantitative Analysis of Investor Behavior.”
Over the last 19 years, the average equity investor earned just 2.57% annually, the companys analysis finds. That is even less than inflation during that period, which amounted to 3.14%. And it is well below the 12.22% the S&P 500 index earned annually during those same 19 years.
The average fixed income investor actually did better than equity investors, although they earned a relatively paltry 4.24% annually over the 19 years, compared to the long-term government bond index gain of 11.7% annual gain in that period, Dalbar reports.
“As market returns rose, investors poured cash into funds in an attempt to capitalize on high returns,” the company explains in its report. “When the market swung low, investors scrambled to redeem their shares before they lost additional money. In fact, the average investor remained invested in equity or fixed income funds for less than three years, their decision to sell or buy motivated primarily by the swings in the market.”
In short, Dalbar notes, investors habitually buy high and sell low, and thus earn considerably less than the market indices.