Investments (Still) Outperform Investors
Investments (Still) Outperform Investors
In 2001, I broke the news to many of you in the very first episode of this podcast that the average equity investor performs worse than the investments the investors invest in. It will shock none of you that investments still outperform investors.
Episode 1: Investor Vs. Investment Return
The first and foundational episode on the difference between investor and investment returns. We looked at data from the 2020 Qualitative Analysis of Investor Behavior (QAIB) for data ending December 31st, 2019. Dalbar puts together this comprehensive annual report tracking the behavior and returns of the average fund investor. It was quite telling, and it revealed a massive difference between the returns of the investments we track versus the investments we earn as investors.
A lot has happened since 2019. A global pandemic rocked the world economy and society. Wars broke out. Inflation hit a 40-year high. The Fed raised interest rates faster than at any point in history, causing bond prices to plummet. Through all this, have investors done better or worse?
The QAIB Report is nearly $2,000, so I don’t like to get it every year. But it’s time to update all of us on the latest data, which ends December 31, 2023. With the 2022-23 bear market all but recovered by then, and the last 30 years looking like the chart below, it feels like a good time to revisit things.
Investments Outperform Investors by 1-5% Per Year
Across all rolling time periods, investments outperform investors. Let’s take a look.
| Years | Equity Investor | S&P 500 | Difference |
| 30 | 8.01% | 10.15% | -2.14% |
| 20 | 8.66% | 9.69% | -1.03% |
| 10 | 8.47% | 12.03% | -3.56% |
| 5 | 12.09% | 15.69% | -3.60% |
| 3 | 4.22% | 10.00% | -5.78% |
| 1 | 20.79% | 26.29% | -5.50% |
Investors have not done well in the short term, underperforming the S&P 500 by 3-5% per year. These gaps are slightly larger than the 1, 3, and 5-year periods we looked at in Episode 1. It is no surprise that in a five-year period that included as many of the doom-and-gloom events as we’ve endured, investors didn’t stay invested well.
The gap between investor returns and the index reduces as you go further out. But the impact of that gap widens. Percentages don’t mean much to us. Let’s look at it in dollars.
Investments Outperform Investors by Thousands
If you took $10,000 and invested it in the Vanguard S&P 500 Index Fund (VFINX) at the beginning of each period, you’d have the results below. The table also displays the results of the average equity investor managing the same $10,000.
| Years | Equity Investor | S&P 500 | Difference | Investor Results | Investment Results | Difference |
| 30 | 8.01% | 10.15% | -2.14% | $86,019.23 | $176,150.13 | ($90,130.90) |
| 20 | 8.66% | 9.69% | -1.03% | $36,357.36 | $62,093.34 | ($25,735.98) |
| 10 | 8.47% | 12.03% | -3.56% | $20,120.96 | $30,729.66 | ($10,608.70) |
| 5 | 12.09% | 15.69% | -3.60% | $16,649.84 | $20,583.21 | ($3,933.37) |
| 3 | 4.22% | 10.00% | -5.78% | $11,272.95 | $13,254.03 | ($1,981.08) |
| 1 | 20.79% | 26.29% | -5.50% | $12,079.00 | $12,611.00 | ($532.00) |
Simply astounding. Investors are losing tens of thousands of dollars over the decades compared to what the equity indexes are doing. The longer they invest, the more they lose. As James Clear says in Atomic Habits, “Time magnifies the margin between success and failure.”
Note that these gaps are per $10,000. What if you had $100,000 invested for thirty years? We’re talking about missing out on nearly $1,000,000 in growth.
Why do Investments Outperform Investors?
Investments outperform investors because index funds don’t make mistakes. These gaps in performance are entirely caused by our behavior as investors. It’s why Carl Richards so aptly named it the “Behavior Gap” in his eponymous book. We have repeatedly looked at the Four Horsemen, which are the main behavioral mistakes we make. But there are other reasons that lead to these gaps.
Over the next few weeks, we are going to look at the rest of the results of the Quantitative Analysis of Investor Behavior and its many implications for us as investors. My goal is to make you a better investor, to close the gap between your performance and the performance of your investments, and to ultimately earn you thousands more in results. I think that’s worth a few weeks of attention.
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This article is educational only and is not intended to be investment, legal, or tax advice or recommendations, whether direct or incidental. Again, this is not investment advice. Consult your financial, tax, and legal professionals for specific advice related to your specific situation. Never take investment advice from someone who doesn’t know you and your specific situation. All opinions expressed in this article are those of the people expressing them. Any performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be directly invested in.
