The Dalbar Study
Click here to read the 12-page abbreviated report from Dalbar Inc’s 2008 Quantitative Analysis of Investor Behavior 2008 edition.
Dalbar Inc.’s independent research released its 15th annual report of historical investment returns compared to the average investor’s actual returns. Dalbar’s studies reveal the average investor significantly underperforms the market, due to investment behavioral trading rather than holding investments through market ups and downs.
To illustrate, “The Story of Quincy & Caroline” is reproduced below from the Dalbar Inc. website www.qaib.com
The Story of Quincy & Caroline
Quincy and his wife Caroline inherited $20,000 in 1985. Quincy heard that mutual funds were the best way to put money away and he and Caroline decided that they would put their windfall into mutual funds. They decided that they would split the money and each put $10,000 in their own account. They both selected the same stock mutual fund and put their money in on the first business day in January, 1986.
In the twenty years since that time, Quincy has stayed on top of the market, checking on how his investment was doing every month. Caroline in the meanwhile was more concerned about raising their kids and would listen to Quincy talk about how much he was making and occasionally, how much he had lost.
A year later Quincy was very happy with his decision, the investment was now worth $12,000 and so was Caroline's.
After two years, at the end of 1987, Quincy was very worried about all the news of the market crash in that happened in October. When he checked on his investment it had fallen from $12,000 a year earlier to $9,600. He decided to limit any further loss and withdrew half of his investment and put $4,800 in his checking account. He wanted Caroline to do the same thing with her $9,600, but she talked it over with her friend and decided against doing anything. Her friend, who was a financial advisor, assured her that the market would bounce back.
By the August of the next year, Caroline's account was back up to $12,000 level but Quincy still had $4,800 in his checking account, that did not increase when the market did. Quincy regained his courage by the end of 1988 and put the money back into his mutual fund. By this time Caroline's account was worth $15,000 and Quincy's was only worth $12,300.
In the intervening years Caroline simply let her nest egg grow but Quincy moved money in and out of the market. He would read the stock market reports and talk with friends to find out what they were doing. When he became worried about losing his money he would withdraw some and when his confidence was restored he would invest it again.
By the end of 2005, Quincy had built his initial $10,000 investment up to a whopping $21,422. Caroline had not touched her investment so it suffered during times of market declines and recovered when the market did. By the end of 2005 Caroline's account was worth... $94,555.
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