This is a great chart to show in your class when you are discussing two different strategies for investing:  active vs. passive management.  So, here’s what you are looking at.  It shows returns over the past 20 years (through end of 2013) for forty-three indices.  For example, an index made up of energy stocks returned over 12% per year (roughly translated $1 invested in 1993 in a basket of energy stocks would be worth almost $10 at the end of 2013.  From where I stand in 2015 with the price of a barrel of oil down almost 50% in the last six months, the energy stocks have gotten clobbered, but I digress.

As another frame of reference, the S&P500, the most popular domestic stock index grew at over 9% per year over this time period, so $1 invested in 1993 would have been worth about $5.6 at the end of 2013.  So, what is the red bar on the far right hand side of the chart labeled “Average Investor?”  As the label suggests, it represents the returns of the average investor as measured by the research firm Dalbar, which were about 2.5%, which would have increased $1 to $1.63 twenty years later.

So, why the huge differential between the S&P500 and the “average investor?”  Three immediate thoughts come to mind:

• Psychology:  investors have this terrible tendency to sell low and buy high so they sold during market lows and didn’t get back into the market to capture the market when it swung back up.
• Fees:  Most people still don’t invest in indexes (some as low as 0.05%, 20 times less than active funds) and are instead chasing market outperformance by buying actively managed funds (1% fees and higher).  According to ICI, an investment research  firm, “As of year-end 2013, 372 index funds managed total net assets of $1.7 trillion.”  With a fund complex of $15 trillion, indexes made up less than 10% of total assets, with the index funds being just over 18% as a share of stock (or equity) funds.
• Investors may own a mix of assets including stocks and bonds so the S&P500 might not be the best barometer but even if you assume a 60/40 split for stock/bonds, the blended return would be significantly higher than the average investor.

The message to students:  Avoid Being the Average Investor!

About the Author

Tim Ranzetta

Tim's saving habits started at seven when a neighbor with a broken hip gave him a dog walking job. Her recovery, which took almost a year, resulted in Tim getting to know the bank tellers quite well (and accumulating a savings account balance of over $300!). His recent entrepreneurial adventures have included driving a shredding truck, analyzing executive compensation packages for Fortune 500 companies and helping families make better college financing decisions. After volunteering in 2010 to create and teach a personal finance program at Eastside College Prep in East Palo Alto, Tim saw firsthand the impact of an engaging and activity-based curriculum, which inspired him to start a new non-profit, Next Gen Personal Finance.