The average stock fund investor has far underperformed the average stock fund return from 1988 thru 2007, according to Dalbar, Inc., which published "Quantitative Analysis of Investor Behavior" (July 2008). According to Dalbar, the average stock fund has returned 11.6% while the average stock fund investor has only earned 4.5%. Dalbar labels the 7.1% difference the "Investor Behavior" Penalty.
Now the "Investor Behavior" penalty is not a new revelation. Dalbar first pointed it out in the late 1990s (early 2000s?) There are numerious explanations as to why investors underperform the very investment vehicles they use, but most center around peoples' inclination to chase performance. The reality is that past performance is no predictor of future performance in mutual fund land. Given that there are maybe 10,000 mutual funds out there, the task of picking a few long-term outperformers is more or less impossible. Focusing on low-cost, tax-efficient funds with a stable investment discipline is about the best one can do. Indexing fits the bill nicely.
