Research has shown that the investment results of the average investor underperform the returns of the funds they have invested in. How is this possible?
By measuring the dollar weighted returns of mutual funds, empirical evidence shows that, on average, investors in funds are more likely to own the funds when they are going sideways to down than when they are going up. Investors, fighting the powerful emotions of greed and fear, on average, will mistime their entry and exit points.
For the period of 1990 to 2009 the S&P index had an annualized return of 8.2%. The average equity fund investor had an annualized return of 3.17%.1 In the world of compound returns, this difference is enormous.
It is imperative to long run investing success that investors exercise the patience and discipline to stay the course long enough to allow the power of compounding work for them.
1. Source: “Quantitative Analysis of Investor Behavior, 2010,” DALBAR, Inc.