True Investor Returns, Pt II

After writing the last post, I was curious about the actual results of previous studies and decided to do a little digging about the history of the DALBAR anlaysis of investor vs. fund returns. My gut agreed with Nick Murray's contention that the underperformance of investors vs. funds remained fairly constant (in all the time I can remember seeing the survey results since I started in the financial business in 1994 that seemed to be the case), but I wanted to verify that. I did some googling and found these excerpts taken from the public pages of DALBAR's website, proving that this is not a new phenomenon.

From the 2001 update page

QAIB (Quantitative Analysis of Investor Behavior) examines real investor returns from equity, fixed income and money market mutual funds from January 1984 through December 2000. The study was originally conducted by DALBAR, Inc. in 1994 and was the first to investigate how mutual fund investors' behavior affects the returns they actually earn.

The following annualized returns for investors, whose average fund retention was 2.6 years in 2000 (down from 2.8 in 1999, but up from 1.7 after the stock-market crash in 1987), compared to corresponding indexes, clearly illustrate the benefit of buy-and-hold strategies:

• The average fixed-income investor realized an annualized return of 6.08%, compared to 11.83% for the long-term Government Bond Index;
• The average equity-fund investor realized an annualized return of 5.32%, compared to 16.29% for the S&P 500 Index; and,
• The average money-market fund investor realized an annualized return of 2.29%, compared to 5.82% for Treasury Bills and 3.23% for inflation. Money-market fund investors lose money after inflation.

From 2003

Motivated by fear and greed, investors pour money into equity funds on market upswings and are quick to sell on downturns. Most investors are unable to profitably time the market and are left with equity fund returns lower than inflation.

• The average equity investor earned a paltry 2.57% annually; compared to inflation of 3.14% and the 12.22% the S & P 500 index earned annually for the last 19 years.
• The average fixed income investor earned 4.24% annually; compared to the long-term government bond index of 11.70%.

From 2004

It is widely believed that rapid fire trading produces huge profits for traders at the expense of the average investor. But the latest DALBAR study shows that market timers actually lose money instead of making healthy profits.

Examining the flows into and out of mutual funds for the last 20 years, the DALBAR study of investor behavior found that market timers in stock mutual funds lost 3.29% per year on average. Over a period when the S&P grew by 12.98%, the average investor earned only 3.51%.

“This finding is consistent with the well known behavior of investors to brag about their gains, but remain silent about losses” said Lou Harvey, DALBAR President. “The occasional money makers create the illusion that all timers are winners all the time. The fact is that most timers lose money most often and this data now confirms it.”

The study for the 20 years ending 12-31-2008 didn't have a public page, but the updated results showed equity investor annual returns of 1.87% versus S&P 500 index returns of 8.35% and fixed income annual investor returns of 0.77% versus the Barclays Aggregate Bond index returns of 7.43%.