Several years ago, I began writing an annual update discussing Dalbar’s Quantitative Analysis Of Investor Behavior study. The study showed just how poorly investors perform relative to market benchmarks over time and the reasons for that underperformance.

With the release of Dalbar’s 2017 study, I can update, and remind you, of the problems investors continue to face despite the ongoing media and mainstream rhetoric about “investing for the long-term” and other such nonsense like “dollar cost averaging” and “buy and hold” investing.

Let’s jump right in.

You Can’t Beat An Index…Period

First of all, let’s dismiss the notion that it is possible for an investor to consistently “beat” an index over long periods of time.

You can’t.

Indexes do not account for the impact of taxes, trading costs, and fees, over time. There are also internal dynamics of an index that affect long-term performance which does not apply to an actual portfolio such as share buybacks, substitution, and market-cap valuation.

(For more on the reasons why benchmarking is a bad strategy click here, here and here.)

However, even the issues shown above do not fully account for the underperformance of investors over time. The key findings of the study show that:

  • In 2016, the average equity mutual fund investor underperformed the S&P 500 by a margin of -4.70%. While the broader market made gains of 11.96%, the average equity investor earned only 7.26%.
  • In 2016, the average fixed income mutual fund investor underperformed the Bloomberg Barclays Aggregate Bond Index by a margin of -1.42%. The broader bond market realized a return of 2.65% while the average fixed income fund investor earned 1.23%.
  • Equity fund retention rates decreased materially in 2016 from 4.10 years to 3.80 years. (This is directly related to psychology and behavior.)
  • In 2016, the 20-year annualized S&P return was 7.68% while the 20-year annualized return for the Average Equity Fund Investor was only 4.79%, a gap of -2.89% annualized.

Here is a visual of the lag between expectations and reality.

The underperformance in 2017 directly relates to the psychological behaviors of individual investors. Despite ongoing rhetoric about “buy and hold” and “dollar cost averaging”, both of which are failed strategies as discussed at length here, the reality is that investor psychology is the biggest impediment to long-term success.