Mutual fund investors may be missing the point.
Actually, they’re missing more than 650 of them on average, according to a recent study from Boston-based DALBAR.
In its "2016 Quantitative Analysis of Investor Behavior," DALBAR found that the average equity mutual fund investor earned annual returns of 3.66 percent in the 30-year period ending Dec. 31, 2015, while the S&P 500 index produced annual returns of 10.35 percent over the same period, for a gap of 669 basis points.
DALBAR argues that voluntary investor behavior is the leading cause of diminished returns, not poor investment recommendations, contributing 150 basis points of underperformance annually over the past 20 years and costing investors $122 billion.
Voluntary investor behavior underperformance includes panic selling, excessively exuberant buying and attempts at market timing.
Over the past three decades, investors in asset allocation mutual funds that spread investments over multiple asset classes have faired even worse, earning only 1.65 percent annually, lagging DALBAR’s estimated 2.6 percent annual inflation over the same period. Investors in fixed-income funds managed just a 0.59 percent annualized return in the same period.
Other major contributing factors to investor underperformance cited by DALBAR include fund expenses like management and marketing fees, which added another 79 basis point of underperformance and costing $65 billion; withdrawals for investors’ planned and unplanned cash needs, which contributed 68 basis points and cost investors $55 billion; and investment delays due to lack of cash, which contributed 54 basis points and cost investors $44 billion.
DALBAR noted that fiduciary rule making, which binds advisors to acting in an investors’ best interest, will not impact the leading causes of underperformance.