Stock investors and bond investors alike leave a lot of money on the table. That’s the conclusion from another annual study by Dalbar, a Boston-based research firm. This year’s numbers confirm a long-running trend: sitting tight is a profitable strategy for long-term investors.
For the 20-year period ending in 2011, the average equity/stock mutual fund investor earned about a 3.5% annual return. The S&P500 stock index over this same period earned about 7.8%, a difference of about 4.3%. That means year after year, the average equity investor missed out on an extra 4% that could have been earned just by buying and holding.
That percentage difference may not sound like much, so let’s put it in dollar terms. $10,000 invested over 20 years at about 3.5% comes to around $19,900. At 7.8% (assume you invested in the S&P 500 the whole time), that $10,000 would have grown to almost $45,000, a difference of over $25,000. That’s pretty good money for doing nothing except sitting tight. You can imagine the differences if you started with say $100,000…the difference would have been about a quarter of a million dollars. Does that grab your attention?!?
Bond mutual fund investors fared no better. The average mutual fund bond investor earned just under 1% annually over the same 20-year period, while a broad-based bond index (the Barclays Aggregate Bond Index) returned 6.5% annually. The difference there was about 5.5% in lost potential return. Using our same $10,000 numbers from the example above with bond returns, the average mutual fund bond investor left about $23,000 sitting on the table.
Why do average stock/bond fund investors lose so much money year after year? Irrational decision-making is often the culprit. Investors make decisions based on their emotions instead of following a disciplined approach. That’s why the typical holding period for a stock or a bond mutual fund is only 3-4 years. Something fearful happens, like the recession in the early 2000s or the big recession in 2008, and investors sell out at low prices. Or when the good times are rolling, investors don’t want to “miss out” and so they buy into the markets when they’re hot, like the late 1990s or the mid 2000s.
In sports, the coaching phrase is “No pain, no gain.” Maybe the corollary phrase in the investing world should be “No plan, no grand.” So today’s question is: Do you have a solid plan for your investments?
Someone may say, “20 years—nobody invests for 20 years.” I beg to differ. If you are over age 50, you’ve probably been saving and investing for retirement for 20 years or longer. If you’re under age 50 and experience a normal life expectancy, you easily have more than 20 years to invest for retirement.
If you’re up for a real-life reality check, review your investing history over the last 20 years. Compare your returns to the stock and bond index returns listed here. I’ll bet you can do a lot better in the future just by sitting tight through thick and thin.