Articles for Financial Advisors

Lagging Performance


Lagging Performance

According to research by Prof. Dichev, from 1926 to 2002, stock investors lagged the stock market by an average of 1.3 percentage points a year, largely due to buying during “hot markets” and selling when stocks performed poorly.

Based on Dalbar data, the typical stock fund investor earned 3.7% annually over the 30 years ending 12/31/2013; a period when the S&P 500 returned 11.1% annually. This means investors who bought stock funds underperformed the market by 7.4 percentage points annually over the past 30 years. Dalbar, a financial research firm in Boston, has updated this frequently cited study every year since 1994.

Part of the large gap (3.7% vs. 11.1% per year) may be due to the fact stock investors often make withdrawals (down payment on a home, retirement needs, buying a car, etc.) when the market is not doing well. Another reason is because a typical mutual fund lags the market by 1.0 to 1.5 percentage points each year because of its expense ratio and internal trading costs.

The chief culprit is investor psychology: the market is flooded with money after it has gone up substantially and then massive withdrawals occur after there has been a moderate or severe decline. This “buy high” and “sell low” mentality makes perfect sense when you consider the power of greed and fear.

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Age 50 to 70 ½

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