Tuesday, September 13, 2011

Are You An Average Investor? (Hint: Hope You're Not!)

DALBAR, an independent research firm, recently published a 20-year study that illustrates how the average investor has fared compared to the market as a whole. According to the study, the average stock-fund investor has achieved an annualized return of only 3.83% from 1991 through 2010. Had these investors simply invested their money in the S&P 500 (composed of large U.S. company stocks) and forgotten all about it, they would have achieved a 9.14% annualized gain.

Keep in mind that investing solely in the S&P 500 isn't maximizing the diversification in an investor's portfolio. After all, the S&P 500 doesn't include small and mid sized companies, or international stocks. History tells us that over long periods of time, a diversified portfolio should outperform a non-diversified portfolio.

Even a simply buy-and forget strategy with bonds would have achieved greater returns than what the average stock fund investor achieved over the last 20 years. An investor who simply held the Barclays Aggregate Bond Index since 1991 achieved an annualized return of 6.89%, and encountered much less volatility and risk than the average stock investor was exposed to.

Consider the difference between an investor earning an average annual return of 3.83% as opposed to 6.89% or 9.14%:

$100,000 Invested At Different Growth Rates

Rate of Return




10 Years




20 Years




30 Years




Notice the growth in the funds invested at the 3.83% return that the average investor achieves. It should be readily apparent that a 3.83% return is simply not enough growth to provide most of us with anything near the retirement we strive for. So how do we avoid being "an average investor?"

This study illustrates that investor behavior is the biggest culprit causing individuals to achieve below average performance. No single mistake explains this poor performance. Rather, there are a combination of errors repeated over and over - mistakes that can be overcome by simply implementing and adhering to a disciplined investment strategy.

Tomorrow we'll review a list of some of the most common, hurtful mistakes that the average investor makes. Beware: you'll see that the majority of these mistakes are encouraged by CNBC and some of your favorite websites.


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Annie said...
This comment has been removed by the author.
Annie said...

Buying and selling of investments within a portfolio is called investment strategies.It can take in many forms and done either by the consumer or a professional.