Friday, January 27, 2012
Are You Better Than The Average Investor?
The latest study conducted by DALBAR shows that from 1991 through 2010, the average equity fund investor realized an average annual total return of 3.8%, while the S&P 500 Index provided an average annual total return of 9.1%. Similarly, over the same time period the average fixed-income investor obtained an annual rate of return of just 1.01%, while the Barclays Capital U.S. Aggregate Bond Index returned 6.89%.
Research indicates that investment decisions can be affected by a variety of issues, including "herd mentality," overconfidence, pride and regret. There is also a tendency to respond much more strongly to losses than to gains, a tendency that drives many investors out of the markets during acute declines. Thus, this difference in returns is largely attributable to investors getting in when times are good -- essentially buying high and selling low.
The lesson here is that a consistent financial plan helps investors focus on the long term and avoid the type of habits displayed by the average investor.