Emotions continued to play havoc with investor returns in 2008. DALBAR’s update of its Quantitative Analysis of Investor Behavior (QAIB) study found that while the S&P 500 has returned 8.35% over a 20 year period ending in 2008, the average equity investor earned just 1.87%, which was less than the inflation rate of 2.89%. Bond investors fared no better. They earned returns of just 0.77% compared to 7.43% for the index.
The DALBAR update isn’t surprising. The QAIB has consistently shown a large gap between the returns investors actually earn and the return they could have easily earned with a buy-and-hold strategy.
Other studies have confirmed DALBAR’s findings. John Bogle in The Little Book of Commonsense Investing (read review here) calls it the grand illusion — the returns reported by mutual funds aren’t actually earned by fund investors. He estimates the over a 25 year period ending in 2005, the average mutual fund investor earned 7.3% compared to the 12.3% for the benchmark. The shortfall isn’t limited to active fund investors. Bogle also notes that index fund investors earned 10.8%, a full 1.5% shortfall compared to the index over the same 25 year period.