DALBAR Analysis Shows Poor Performance by Mutual Fund Investors

By on April 9, 2012

Simon Constable, writing for the Wall Street Journal, has written about the challenges facing mutual funds in their quest to keep up with, or beat the market. The headwinds the managers of these funds are severe which include fees (both to the investor and brokerage fees paid by the fund), and the drag of any cash balances (paying nearly zero) on returns.

In this article Constable highlights that poor timing decisions by investors in mutual funds add to the challenge of beating the market. He cites the latest data released by DALBAR, a mutual fund research firm operating in Boston.

In the 20-year period ending in 2011, average equity fund investors had annual returns of 3.49% according to DALBAR’s analysis. The S&P 500 had annual returns of 7.81% over the same timeframe. This is a massive difference, and over 20 year amounts to an extreme transfer of wealth from fund investors to the fund companies (and other, more astute investors).

Achieving the returns cited above, average equity fund investors starting with $10,000 over 20 years would have an ending balance of $19,859. Those who chose to invest in the S&P 500 would have an ending balance of approximately $44,500, if you take off .06% per year for an S&P 500 index fund fee.

Constable comes to the conclusion, citing the opinion of Ric Edelman, CEO of Edelman Financial Services, that investors should avoid mutual funds altogether and focus on investing in ETF’s for the long-term.

Source: Wall Street Journal

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