January 17, 2022

Beginning in the 1990s, DALBAR Inc.’s Quantitative Analysis of Investor Behavior (QAIB) report is an annual report on individual investor behavior. It has been updated every year for 27 years to reveal the performance of the average annual equity investor relative to the market overall.

The 2021 mid-year update indicated the average investor is earning returns below the market average. The QAIB shows how the average equities investor has consistently earned returns below market averages. Plus, the gap between what most investors earn and what the market delivers on its own is quite large in most years.

Why is this?

You would think most investors who invest in index funds would make about what the market makes each year, give or take a little for fund expenses. But that’s not the case.

For the 20 years ending Dec. 31, 2020, the S&P 500 Index averaged a 7.43% annual return. The average equity fund investor earned 5.96%. So, the average investor underperforms the market by about a quarter (or 24.66%).

It may seem there’s some cheating going on or something of the sort, however, that isn’t true. In fact, investors are doing it to themselves. The QAIB studies have shown that most individual investors in stocks and equity mutual funds tend to trade in and out of the market too often for their own good, often sacrificing profits or making losses worse.

One explanation that makes sense to me is that people think they’re smarter than they are. Perhaps the best thing an individual investor in an equity index fund can do is to forget they own the account and let it grow on its own, undisturbed.