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.

This article has 22 comments

  1. >>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.

    This is very surprising. Does he try to qualify why this might be? Fees and timing?

  2. Canadian Capitalist

    Sampson: It is timing. Passive investors are not immune to chasing performance (buying stocks after a run up) and either waiting for the dust to clear or pulling money out in a downturn.

    In fact, the about half the actual shortfall that Bogle observes for active funds are due to fees and the other half due to emotions. Index investors, of course, have nominal fees, so almost their entire shortfall is due to emotions.

  3. Thanks, and great review – this is actually a read I might be very interested in.

  4. This does sound very interesting. The sample chapter was entertaining as well. I don’t usually buy books, and my library has 5 copies of this book. They’re all checked out right now but I’ve got a hold on it and will be able to read it soon.

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  6. I think it is timing, too. My question is, though – how much of it is *investors* behaving badly, or investors acting on *bad advice*?

    I guess I’d need to figure out the proportion of people investing with an advisor or the proportion of dollars in managed (not self-directed) accounts in order to answer that. Hmmm.

  7. I am also surprised that index investors could underperform the S&P 500 due to “timing”.
    I guess if you dollar cost average yor way into an index fund over the course of an year, you would underperform the index by year end in most years, especially since over 70% of the years the markets go up..

    • Canadian Capitalist

      @DGI: I think Bogle estimated the actual investor returns based on fund inflows and outflows. He does note that it is hard to estimate but my gut feeling is that it is correct. Investors do panic and pull money out in bear markets. They also may not be making regular investments and waiting for the dust to settle. Problem is when markets bounce back sharply, as we’ve recently seen (if March indeed was the bottom).

      @Alexandra: I tend to think of advisors as average investors as well, though they may disagree 🙂 As a group, they chase performance and panic just like DIY investors.

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