When the going gets tough, investors panic. That, at least, is the conclusion in the latest report from DALBAR's Quantitative Analysis of Investor Behavior - which the Canadian Capitalist wrote about on the anonymous personal finance blog.
The report updated data on how average investors have fared, using net changes in mutual fund sales and redemptions each month, next to various benchmarks. Over the past 20 years, to the end of 2008, the S&P 500 has returned an average of 8.35 per cent a year. However, the average investor earned just 1.87 per cent a year, or substantially less than the rate of inflation.
"The DALBAR update isn't surprising," the Canadian Capitalist said. "The QAIB has consistently shown a large gap between the returns investors actually earn and the return they could have easily earned with a buy-and-hold strategy."
DALBAR also looks at how often investors make a good bet - buying low and selling high - again, based on mutual fund inflows and outflows. Turns out, investors do okay during bull markets, with more than 50 per cent making the right moves. However, during bear markets, they tend to sell low: In 2008, the so-called guess-right ratio was 42 per cent. The ratio hit a low of just 25 per cent in 2002.
While this sort of study could be used as fodder by financial advisers and mutual fund companies, keep in mind that they are not above making similar wrong-headed decisions. Standard & Poor's regularly takes a look at mutual fund peformance, and consistently finds that the vast majority of funds lag their benchmark indexes over the longer term.