DALBAR QAIB 2008
DALBAR, an independent research organization, recently released the annual update of their Quantitative Analysis of Investor Behavior (QAIB) research report.
Click here to read the 12 page PDF.
Within the pages of this annual research report are several eye-opening facts, but the most important among them can be found in the second paragraph on page 3:
Based on an analysis of actual investor behavior over the 20 years ended December 31, 2007, the average equity fund investor would have earned an annualized return of just 4.48% -- underperforming the S&P 500 by more than 7% and outpacing inflation by a mere 1.44%. Fixed income investors would have fared far worse, losing their purchasing power by an average of 1.49% per year. Asset allocation fund investors would have done a bit better, beating inflation by 0.41% per year.
This highlights and quantifies an important fact that I've talked about before and will certainly revisit again in the future. The fact is that there is a difference between investment returns and investor returns.
It's easy to find information about which mutual fund or stock has had the best investment return in the past, but it's what you do as an investor that will determine the outcome of your investment experience today and in the future. If you identify what you consider to be the best investment in the world, but you buy at the wrong time and/or sell at the wrong time, you can have a miserable investment return and this can compromise your ability to meet your most important goals.
In other words, while I think it's important to have sound, low-cost, well-diversified investment vehicles in your portfolio, the more important factor is your investment behavior. Do you have the patience and discipline to stay the course when the financial media and everyone else claims the sky is falling? Do you have the courage to buy more of your investments when their prices have fallen? Do you have a long-term asset allocation strategy that will carry you through the inevitable ups and downs of various market cycles?
Think about it. There is a reason that the average investor does 7% worse per year than the average investment.
For more on this "Behavior Gap", check out the website of my friend and colleague, Carl Richards, at BehaviorGap.com.