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In volatile times, human nature can wreak havoc on the returns of investors. When investments under-perform for a short period, people tend to feel discouraged and uncertain, often deciding to take their losses or shift to a style that seems to be working better. When investments enjoy a period of good short-term results, people feel renewed confidence and optimism and money pours in. Ultimately, we believe investors are best served by maintaining a long-term perspective. Although the study below focused on actual mutual fund investing, we believe the lesson applies to all investments.
How frequent switching of investments can hurt returns is illustrated by the following facts: From 1986-2016, the S&P500 Index delivered an average annual return of 10.35% while the average stock fund investor earned only 3.66% annually per year. Short-term thinkers rarely prosper. Long-term buy and hold investors benefit from the power of compounding.
Average Stock Fund Investor Return vs. The S&P500 Index Return (1986 – 2016)
Keep in mind that the investor returns reflect investment selection, as well as sales charges, fees, expenses, and transaction costs, whereas the S&P 500 Index returns do not. These factors also contribute to the difference in returns. Indexes are unmanaged; you cannot invest directly in an index. Performance illustrated is not indicative of future results.
* Source: 2017 Quantitative Analysis of Investment Behavior, DALBAR. This study utilizes data from the Investment Company Institute and Standard & Poor’s to compare investor behavior with the returns of the overall equity market. The Average Equity Fund Investor represents the aggregate action of all investors in equity mutual funds. Investor returns are determined using the change in total equity fund assets after excluding sales, redemptions and exchanges. This method of calculation captures realized and unrealized capital gains, dividends, interest, trading costs, sales charges, fees, expenses and any other costs. The S&P 500 Index is an unmanaged index of large-cap U.S. stocks that is considered to be representative of the U.S. equity market.
Southwest Investment Advisors has made this information available as a convenience. Research, information, views, opinions, and other recommendations obtained from sources outside of Southwest Investment Advisors are believed to be reliable, but we cannot guarantee their accuracy or completeness. Opinions voiced in this material are for general information only and are to intended to provide specific advice or recommendations for any individual.