The Average Equity Fund Investor Trails the Market By A Wide Margin...

"A study by research firm Dalbar Inc. reveals that for the 20 years ending December 31, 2009, annualized returns for the S&P 500 index were +8.2%, but returns for the average stock (equity fund) investor were only +3.2%."

U.S. News & World Report, October 2010 Issue

A +8.2% per year average return means that a $100,000 investment in the S&P 500 grew to $483,666 over 20 years. 

But the average equity fund investor only earned +3.2% per year. Under that scenario, $100,000 grows to only $187,756 in 20 years.

But wait. Are we done yet?

What about inflation?

We have to account for the fact that inflation averaged +2.8% during the past 20 years. That means that $100,000 has to grow to $173,015 over 20 years just maintain its purchasing power!

What about taxes?

Because investors were buying high and selling low, they incurred tax liabilities that would reduce their inflation-adjusted and tax-adjusted returns below the rate of inflation.

That means the average investor's purchasing power after taxes,  inflation and a +3.2% annual return has not increased, rather it has steadily eroded.

Another "average investor" study by TrimTabs Investment Research shows that the stock market ended the past decade pretty much at break even, but average investors lost roughly -$39 billion, or roughly -20% over the past 10 years.

"It cost them about -20% to buy high and sell low," says TrimTabs' Vincent Deluard.


BOTTOM LINE: 

1. Sadly, over the past 2 decades, investors haven't built any real wealth during neither the past 10 years nor the past 20 years. Taxes, inflation, fear, greed, the business cycle, financial crises and market meltdowns all conspired to, not grow, and not even maintain, but shrivel the purchasing power of the average investor.


2. The vast majority of passive investors simply don't have and never will have the psychological discipline to keep the faith during bear markets meltdowns of -30%, -40% or -50% that decimate their retirement nest eggs. 


And who can blame them?

Thankfully, there is a better way.