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In the two decades through December, the average return of all investors in U.S. stock mutual...

In the two decades through December, the average return of all investors in U.S. stock mutual funds was an annualized 4.25% vs 8.2% for the S&P 500. That translates into a difference of $25,467 for an investment of $10,000. "The dismal truth is that over the long run, the average person is a woeful investor," writes the NYT's Jeff Sommer.
Comments (42)
  • This sort of article really angers me.
    The fact is the DOW Indexes are a fraud in that stocks that look likely to go down are replaced endlessly by stocks those who control of what goes into the Dow think is likely to go up, as it is in their interests to induce people to believe that stock markets always rise in the end.
    Inflation apart they do not, as in reality there is a constant turnover of new companies disrupting the old, and of the 100 companies in Fortune's top 100 some 75 years ago, none are there today and few exist at all.
    The simple answer to investment is that it is necessary to cherry pick and be constantly on the ball, buying and selling and never waiting for a loss to recover itself as they seldom do.
    The huge rises to be seen in Facebook and the few like it are only gotten by those who got in very early in the game and for the average investor this is in itself almost impossible since they have no means of hearing about small stocks (which they are also told are too dangerous to invest in) and in addition the venture capital people get there way before them, and usually only sell to the public very near the top when the public first get a chance to participate.
    Anybody who does not understand this underlying truth of stock markets is living a lie which they will surely regret.
    10 Mar 2013, 07:29 AM Reply Like
  • Hi John,

     

    The reality is actually just the opposite of what you have described. The managers of the Dow Jones Industrial Average and S&P 500 Nasdaq 100 take companies out after they decline and add new companies before they are likely to go down. We’ve written several articles showing how the Dow, S&P 500 and Nasdaq 100 have added companies at their respective price peaks and dropped companies at the point where they were near the low or just before the price was going to jump.

     

    Currently, S&P manages the components of the Dow Jones Industrial Averages.

     

    However, one thing must be made clear regarding the value of the Dow Jones Industrial Average, if dividends were included in the computation of the index it would stand at over 700,000, or more than 45 TIMES the 14,397 figure that you see quoted today. Therefore, the comment, “…Inflation apart…” ignores a significant aspect of the total return minus inflation.

     

    Our work on this topic:

     

    "Dow Jones' Decline Largely Impacted by Index Changes." (found here: http://seekingalpha.co...)

     

    "Recovery From 1929 Crash Was Quicker Than Most People Think" (http://seekingalpha.co...)

     

    “Annual Nasdaq Re-Rank Review” (http://seekingalpha.co...)
    ‘Apple-less Dow’ Is A Good Thing” (http://seekingalpha.co...)

     

    Regards.
    10 Mar 2013, 09:47 AM Reply Like
  • johnbee, the question for most investors is simply whether they would be better off buying and holding an S&P500 index fund, such as (SPY) or (IVV) or even better (RSP). If you'd have done that, you'd have got the performance described in the article without having to do the things you described, such as cherry pick stocks, trade, get into tech stocks early or invest in small caps or venture capital.

     

    New Low Observer, you're right that S&P's track record in choosing which stocks to add to the S&P500 index hasn't been stellar, particularly in the late 1990s. And yet, and yet... simply buying and holding SPY or a Vanguard S&P500 index mutual fund would have resulted in far better performance for most people than what they actually did.
    10 Mar 2013, 12:54 PM Reply Like
  • Good point David.

     

    I especially like your reference to RSP. As always, it is about compounding.

     

    Regards.
    10 Mar 2013, 01:04 PM Reply Like
  • Good point, David. I think the retail investor ought to feel free to select individual stocks, bonds and funds as s/he chooses. But it pays off to build around something like RSP so that there is a reasonable assurance that a large part of the portfolio will track the market.

     

    Last year, most hedge funds would have done far better holding RSP than doing whatever it was they did.
    10 Mar 2013, 06:25 PM Reply Like
  • "Last year, most hedge funds would have done far better holding RSP than doing whatever it was they did."

     

    Given that hedge funds get paid to underperfoem the market, no one would pay them their fees if they just help RSP. These people have families too you know? You want them out in the street or flipping burgers?
    10 Mar 2013, 09:12 PM Reply Like
  • Why blame individual investors? Aren't mutual funds supposed to be professionally managed? Blame the managers.
    10 Mar 2013, 07:53 AM Reply Like
  • jhenn19630,

     

    There are three causes of investor underperformance:

     

    1. Mutual fund managers don't beat their benchmarks on average. (When I researched this at http://bit.ly/10z6cls , the data showed that on average mutual fund managers underperformed the index by 2-3 percentage points a year.)

     

    2. Expenses for actively mutual funds are meaningfully higher than for index funds and ETFs.

     

    3. Most individual investors trade in and out of funds, and end up buying high and selling low.

     

    Arguably, numbers (2) and (3) are the responsibility of individual investors.
    10 Mar 2013, 12:42 PM Reply Like
  • As I've been posting and talking ! S*P 500 gained 30% over past 5 years and the great Warren Buffet was up 10%..

     

    As President Obama said in State of Union "I got China to raise Yuan 11% in my first term"..

     

    So, by putting plain old cash in a BOC US account in Yuan returned you 15%.. 11 % currency gain and the 1% interest on the balance. And, FSLIC insured it.. Hey now !
    10 Mar 2013, 01:02 PM Reply Like
  • Mutuals managers move in packs. They hang together and buy same symbols.
    10 Mar 2013, 01:10 PM Reply Like
  • Typical NYT case of ignoring the obvious - the people managing stock mutual funds are not earning their keep - they are all indexed to something, and they are not even coming close - chimps pulling levers might do a better job ...
    10 Mar 2013, 08:05 AM Reply Like
  • The "average person" would greatly improve their chances of getting good returns if they turned off CNBC, stopped reading business stories in the NYT, and based their investment decisions on their own research and common sense. Looks to me like it's the "average mutual fund manager" who is the "woeful investor".
    10 Mar 2013, 08:37 AM Reply Like
  • The 'average person' pursues something entirely not market oriented as their primary occupation and assumes that fund managers or their 401k is in the hands of competent professionals.
    On the other hand, the 'average person' probably finds or makes 'alpha' in their primary profession unavailable to fund managers.

     

    I'm a real estate investor primarily. The chances of a 'fund manager' outperforming me in real estate are slim to lucky. My mechanic probably doesn't pay as much in maintaining his vehicles as his 'fund manager' does. We all leverage our proficiencies in the end to do well in our core competency area.

     

    I see nothing intrinsically wrong with the fact that folks who do not dedicate their entire waking day to investing are outperformed by those who do.
    10 Mar 2013, 09:25 AM Reply Like
  • David,

     

    That's what I do. No CNBC no NY Times or WSJ. I keep my ears and eyes open for opportunities but I ignore the mass media. The real opportunities are for the early adopters. I do real Seeking Alpha to get a good feel for current market sentiment but when I know something is undervalued I buy it.

     

    I suggest finding one or two opportunities or searching seeking alpha for articles written about companies before their rise. Then see what else these people are writing about. That should guide you to some good new companies to do the dd on.

     

    Never buy anything because someone said it is a good idea. People will buy a stock based on safety in numbers which turns into losing money. At least we did it together. Luckily that lesson only cost me 300$ at the school of hard Knox.

     

    D
    10 Mar 2013, 04:18 PM Reply Like
  • You forgot to add...do not let your political beliefs dictate your investment decisions....
    10 Mar 2013, 04:44 PM Reply Like
  • ""The dismal truth is that over the long run, the average person is a woeful investor," writes the NYT's Jeff Sommer. "

     

    The dismal truth is that mutual fund managers are lousy and grossly overpaid.
    10 Mar 2013, 08:44 AM Reply Like
  • Exactly! Take out a percent or two every year and you end up with lower performance after 10 or 20 years. Its not rocket science.

     

    As with most things in life - people should take responsibility for their own financial decisions - including making investment decisions. And if you choose to rely on others, don't be surprised to find out they think about themselves and their interests first and yours second (or third or fourth).

     

    But it doesn't surprise me that people keep getting suckered by guys in fancy suits and fancy offices - they keep electing the same type bums to Congress every year!
    10 Mar 2013, 02:32 PM Reply Like
  • This is pretty dumb. Looking at the SPY ETF (proxy for S&P500), 1993 was a low point for the ETF, it then exploded higher and peaked in the year 2000, collapsed for two years, got back to the 2000 level in 2007, collapsed again for three years, and as at Dec 2012 ended the year a percent or two below that 2007 peak. The fact is the SPY ETF went virtually nowhere overall between 2000 and 2012. Of course this doesn't account for dividends of about 1.5% per year, but that pales against the documented returns from the cherry picked very low starting point in 1993. The 20 years included a huge amount of volatility that has not been accounted for, and for a valid comparison with mutual fund returns, beta must be included. The article makes it seem that wow, investors really could make money in the market in the past 20 years. However, it all depends on your starting point. Try starting the study in the year 2000 and see how mutual fund performance compares with the SPY.
    10 Mar 2013, 09:41 AM Reply Like
  • nope. the answer will come out the same.
    the fact is that people are lousy investors.

     

    they can't even beat the index which is lousy itself since it adds stocks at dumb moments at high prices.

     

    to understand this you need to read "thinking fast and slow" - ofcourse you won't but you should. it will help you.

     

    P
    10 Mar 2013, 02:16 PM Reply Like
  • The premise of the comparison is almost self fulfilling. If one takes the entire universe of all investors in all funds, then the aggregagte of all funds cannot possibly outperform the market because, effectively, they are the market. Tt means that if mutual funds comprised performance equal to the market, they would still have to subtract all their management fees and commissions, so they will be a couple percentage points less, by definition. Then, for individual investors, we can add the negative effects of buying funds at tops and selling them at bottoms.

     

    In the end, we're all responsible for our good and bad decisions, but for many, it's easier to make bad ones because beating markets requires contrarian behavior.
    10 Mar 2013, 10:18 AM Reply Like
  • Correct. It is always harder to do what is right. Nice comment.
    10 Mar 2013, 10:46 AM Reply Like
  • Did the average stock mutual fund over that time period yield 8.2%?
    10 Mar 2013, 10:43 AM Reply Like
  • Wait a minute ! I need all those losing mutual fund managers so I can make my money. Let's not kill the golden goose here.
    10 Mar 2013, 10:52 AM Reply Like
  • HAHAHAHA! Funny! =D
    10 Mar 2013, 12:10 PM Reply Like
  • And the pension fund managers did much better than individual investors? I suspect not.
    10 Mar 2013, 11:28 AM Reply Like
  • Week after week Ben Stein goes on camera and says I'm not smart enough to pick individual stocks and recommends the S*P 500 index. Psst, and he is a genius !

     

    I listened to Charlie Gasparino critique the great Warren Buffet and pointed out in the last 5 years S*P 500 index was up 30% and Buffet was up 10%.. Buffet himself said he didn't do a good job an said he can't beat the index's.

     

    The hedge funds are dropping like flies and even Sorros went private.
    Paulson an Chanos are down big and industry reports showed that 80% of individual accounts were down in 2012.

     

    So, as ALWAYS, it's a stock pickers market and the buy an hold days are gone...

     

    Funny, almost everybody can select a great stock and watch it climb. I just don't understand why 95% of people don't use stop orders and they end up watching the stocks give it all back and then sell !

     

    I did this for a living for 65 years an did real well for my clients and thus for myself. The days of super discount brokers and HFT makes finding a real PRO all that more important.

     

    If you don't use a real pro who takes only a share of the gains then you belong in ETFs. At least in an ETC when those horrible days appear you can go online and see you were stopped out or click and get out. If you've got a mutual fund your trapped till 4:30 PM and the damage is done.
    10 Mar 2013, 12:11 PM Reply Like
  • A simple calculation confirms that indexing is the way to go.

     

    If a working couple starting in 1983 had put the maximum allowable amount every year in SP500 in a retirement account, they would have had more than $650K as of today (granted that such an investment vehicle was not available in 1983, but the result is still worthwhile). A 60/40 portfolio would have led to an even higher amount. Together with the SS of $25K per year, the income generated from this nest egg would put their retirement income at par with the median family income.

     

    That most retirees sixty years of age do not have anywhere close to $650K in their retirement account suggests that there is too much noise in the financial media for a real human to follow this simple strategy.
    10 Mar 2013, 01:14 PM Reply Like
  • varan
    Worse yet, people pre retirement age are raiding their 401K's in record numbers to pay today's expenses. Couple this with your point and we have tomorrow's crisis in the making.
    10 Mar 2013, 01:26 PM Reply Like
  • Wyo - I'd modify that slightly to say they raid their 401K's to pay today's lifestyles.

     

    And when the crisis hits I hope upon hope we tell folks they are sleeping in the beds they made. Had we tried that in 2008 our economy would be booming today.
    10 Mar 2013, 02:35 PM Reply Like
  • This headline confuses me a bit.

     

    Doesn't the average performance of all investors have to be equal to the market (minus fees and comissions)?
    10 Mar 2013, 01:25 PM Reply Like
  • no the average perfomance is the index

     

    even if your funds did as well or better than the index over the past 20 or so years - a very small group - you can do worse through timing.

     

    the fact is that people buy and sell at the wrong time. they buy stuff that's hot and sell stuff that is cold. momentum is easier to play than value. and while you are losing money it is always nice to feel that you have company. this applies to funds, etf and stocks.

     

    read the articles and comments on SA and you have to realize that most experts and average investors are pretty well clueless.

     

    that is what drives underperformance.

     

    P
    10 Mar 2013, 02:11 PM Reply Like
  • I have always said giving money to others to invest is really not a smart move. All you need is look at money managed by professionals and how it consistently under perform compare to the index they try to beat. Probability is better for you to put your money in SPY or a pot of ETF's that are broad based than a pot of managed funds.
    10 Mar 2013, 02:05 PM Reply Like
  • The stock market is a Ponzi - it is designed to take money from investors by using their money as leverage to gamble to benefit the banking houses (funds).

     

    It is additionally bled for fees, and for most is trapped.

     

    The average investor loses because they aren't on the inside track of HFT algo's and the constant manipulation.
    10 Mar 2013, 04:08 PM Reply Like
  • No, the market is rigged against clueless investors. If you panic every time HFT algo's drive prices down, you deserve to lose money.

     

    Smart individuals can take advantage of these HFT "manipulations" to buy on unwarranted drops.

     

    "The market is designed to transfer wealth from the active to the patient"
    -- Warren Buffett
    10 Mar 2013, 06:13 PM Reply Like
  • It is much harder to make money with eight figure buy ins than six figure buy ins. In the zero sum game for an 8 billion dollar mutual fund to return 25% profit it has to make 2 billion. That 2 billion comes from somewhere. It's not pennies from retail.

     

    So it is much easier for little guy me to take a few hundred grand off the mutual than vice-versa but hey mutual funds are safe. The individual investor probably only lost a little.
    10 Mar 2013, 04:23 PM Reply Like
  • Its like a poker cash game, few win, few lose and a few break even, the House is the winner, its that simple, but because of hope and faith, we will try to reach that shiny light right out of arms reach, call it what you want, its just a game in the end... A game I think i can win.....
    10 Mar 2013, 06:05 PM Reply Like
  • There are some wonderful funds and fund managers out there.
    The Vanguard is a great place to invest in mutual funds/index funds, in my opinion.
    Fidelity has some super funds too.

     

    Bill Ackman, I would assume, would fall into the category of "not your aveage investor." His flagship fund has returned 3.6% for the year.

     

    There are many individual investors beating Mr. Ackman's flagship fund's return.
    10 Mar 2013, 06:51 PM Reply Like
  • Mr. Ackman is a great investor because it sure has not been easy to not make money hand over fist in this years market. He researched and carefully choose opportunities that underperformed the market. Shouldn't there be a value to that?
    10 Mar 2013, 09:06 PM Reply Like
  • Been reading this same stat for over 30 years now!! Anyone even remember Mutual Fund Magazine?
    10 Mar 2013, 08:19 PM Reply Like
  • This kind of article really angers me. The author clearly has no regard for professional money managers. They have families too, you know? These guys are generally low-skilled guys whose only way to make millions is to manage other people's money actively, underperform the market, and in the process charge high fees. This is a very nice and cushy job. There are not too many good jobs left in the USA any more. Money management is one of them. You want to take that out too?

     

    For shame.
    10 Mar 2013, 09:05 PM Reply Like
  • "The dismal truth is that over the long run, the average person is a woeful investor"

     

    NO.

     

    The real truth is: Mutual fund managers, Asset gatherers are woeful investors.

     

    End of the story.
    11 Mar 2013, 06:31 AM Reply Like
  • AI, your comment contradicts most academic research on this topic. Eg.

     

    "On average, investors who pick stocks underperform the market by about 2 percentage points a year, according to professors Barber and Odean at the University of California at Berkley." (Source: http://seekingalpha.co...)

     

    The NYT article in the Market Current also says that a significant contribution to mutual fund investor underperformance comes from individual investors trading in and out of funds at the wrong time.
    11 Mar 2013, 09:29 AM Reply Like
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