Chris HopkinsSuppose you had dropped $10,000 into a low-cost S&P 500 index fund 20 years ago and then never opened another account statement. Despite a devastating terror attack on New York City, two major market crashes, a banking system meltdown, and a global recession, your investment would now be worth over $55,000.
Now consider the average equity mutual fund investor. The same hypothetical $10,000 invested 20 years ago is now worth $26,000. What gives?
It turns out that over the long run, it is neither economic cycles nor stock market bubbles that kill our returns. To quote the renowned market sage Pogo: “We have met the enemy, and he is us.” Investors routinely impede their own investment returns by responding to instinctive psychological signals that cause them to move in and out of the market at the wrong time. We know that consistently timing the market is impossible, but we keep doing it anyway.
Over the past 30 years, according to data firm Dalbar, stock fund investors have lagged the market by a whopping 7.4 percent per year. Fortunately, progress has been made thanks to better education and the availability of more low-cost investment options. Underperformance over the past 5 years fell to 2.7 percent per year, still substantial but much improved. Last year, however, was a throwback to the bad old days as the average investor left nearly 7 percent on the table.
Bond fund investors have fared even more poorly, reaping just 12 cents in profit for every dollar of return provided by the bond market on average over the past 20 years. Ouch.