Monday, September 21, 2009

True Investor Returns

In a statistic that never ceases to amaze me, research firm DALBAR calculates that the average investor return is consistently less than half of the return of the average mutual fund. I was reminded of this twice recently: first in reading Nick Murray's book "Behavioral Investment Consulting," in which he cites the 2007 version of the DALBAR survey as calculating the average equity fund investor having a 4.48% return versus the average equity fund realizing a 10.81% return over the previous 20 years. Every year that I've seen this study the results have been pretty consistent, and Murray says in his book that "...although these two numbers will bounce around a lot from year to year, the relationship between them remains eerily constant: over 20 year periods, the average fund investor consistently manages to capture much less than half of the return of the average fund." (emphasis his)

The second reminder of this phenomenon came in an article on titled "Did You Do As Well As Your Fund?" I have not reviewed Morninstar data on this topic previously, but since 2006 the firm has been calculating Investor Returns in comparison to Fund Returns. This article has a very enlightening analysis of popular funds such as CGM Focus and Fairholme in relation to the exceedingly poor investor returns relative to total fund performance.

Morninstar calculates that investors in Fairholme have received a -1.68% return over the past five years compared to Fairholme's 8.56% fund performance over the same time period. CGM Focus investor's return underperformed the fund by a whopping 20% over the past five years! (And that's not 20% total, that's 20% annually!)

More evidence that we don't need to have an accurate prediction of the future to have a good investment experience, we just need to have a good plan and stick to it.

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