Investor vs Investment Returns
Time magnifies the margin between Success and Failure. ~James Clear
The average investor underperforms their investments by half, costing them hundreds of thousands of dollars over their lifetime. We examine investor vs. investment returns, the difference, and why it matters.
The short version is this:
Point #1. Unfocused Attention.
We are focused on investment returns rather than investor returns.
All headlines, news articles, and investment advice are based around the market returns, as measured by the Dow Jones or the S&P, or around the returns of specific companies or mutual funds. Rarely, if ever, do we focus on the investor’s returns, which average about HALF of the investments the investor invests in.
Point #2. Unequal Equities.
The average investor takes home about 1/2 to 2/3rds of the returns of the investments they invest in.
Over the last 30 years, the S&P has averaged an annual return of 10%. The Average Equity Fund investor averaged 5%. That’s half!
If the Average Equity investor had invested $100,000 30 years ago, they would have $450k now. That same $100,000 in the S&P 500? $2 million!
Point #3. Wrong Fixation.
The Average investor LOSES money in “safe” fixed income.
Fixed income, collectively bonds, bills, CDs, and cash, is often seen as the safe investment. The bond index over 30 years shows an average return of 6%. Yes, that’s better than the average equity investor. These returns lead some people to think, “Would the Average investor be better off buying bonds and averaging 6% than risking it in the market only to get 5%?”
Sounds good. But then you see that the Average Fixed Income Fund investor’s 30-year return was just 0.38%! That is less than 1/2 of 1%! Congratulations, your $100,000 after 30 years is now worth $112,000.
There is a big difference between investor and investment Returns. Keep reading or listen to the full podcast to learn more.
You have heard of investment returns. You have thought about them. You have asked about them. You have been exposed to an endless amount of information about them.
But what about investor returns? When was the last time you heard about those? There is a good chance that the answer to that is either:
A. The last time we spoke about it or
B. Never.
That is my first point.
Point 1: Unfocused Attention
We are focused on investment returns rather than investor returns.
We spend too much time and energy focusing on investment returns and not enough focused on investor returns.
Why? Media and ease.
The media constantly bombard us about investment returns. If you watch news or logon to any of the major news websites, you’ll get an instant quote on what the Dow Jones Industrial Average and the S&P 500 are doing. Besides daily quotes, you’ll rarely hear about the returns in the general new media, unless, of course, there is an ongoing crisis. Then you will hear nothing else!
And the financial media is far worse. Carl Richards calls it the Financial Pornography Network. On any given day, thousands of articles and news stories are published about the market, what has happened, and what people think will happen. You can find articles published within minutes of each other that feature financial “experts” forecasting opposite outcomes on any given topic. It is a constant slew of information around what the market and its various components have done and might do.
The other reason is ease. It is easy to find investment returns. You’re choosing your 401(k) options, and you’re presented with 30 possibilities, each with five separate returns over various timeframes. You’re curious what the Vanguards Total Stock Market Fund’s return has been over the last X year, so you Google it, and there it is!
Investment returns are easy to find and easy to calculate. Investor returns are much more difficult to quantify. Investors trade funds, buying and selling. They add money to and pull money from their accounts on both regular and irregular bases. They pay fees and transaction costs. All this adds up to investor numbers that are vastly different from the investments’ returns, as we will see.
Investment returns are repeatedly talked about and easy to find. Investor returns are never spoken of and hard to determine.
But why? As investors, we have absolutely no control over investment returns! We have invested in a company, which we have no control over. Or we’ve invested in an index fund, which follows an index of companies subject to world and local economics, which we have no control over. Or we’ve invested in a fund actively managed by Harvard graduates with more degrees and letters behind their names than we care to know. And we have zero control over those managers and their actions in a world they have no control over.
And the vast majority of those investment wizards have historically underperformed the general index they are trying to beat after fees. That is, even the “experts” have not been able to improve investment returns significantly, and there is no guarantee that those who have in the past will do so again.
So why are we putting so much focus on investment returns? The obvious answer is that an entire investment management industry is trying to get you to invest your money with them. They don’t know you as the investor, so all they can do is appeal to potentially superior investment returns.
But this is the wrong focus.
The investor’s focus should not be on how to increase investment returns, which she has no control over.
The investor’s focus should be on how to increase investor returns, which she has absolute control over.
What investing philosophy will he believe?
What investing principles can she follow?
What investing disciplines must he adopt?
What investing processes can she implement?
And, perhaps most importantly,
Who will she work with that will help guide her in adopting and confirming a philosophy and principles and holding her capable of following the disciplines and the processes she will need to follow for the rest of her life? The stakes are too high to chance it alone.
We will talk about the various aspects of planning and how investors can increase their investor returns throughout this podcast. Here we will continue to focus on the differences between them, rather than focusing on one or the other.
What are those differences, in real numbers?
Dalbar is an organization that has tracked these differences for decades. Using lots of data about the selling and buying of funds and the fees associated with them, they have determined the average investor’s return in any given year.
Now, this is an average, meaning some perform better. But also, some perform worse! Knowing what the Average investor Return is for each year means they can also determine what it has been over multiple years and even decades. They have rolling tallies on the average return of equity investors and fixed income investors going back thirty years. And, as we’ve discussed, it is relatively easy to pull investment returns over those periods.
The difference is stark!
That brings us to our next item.
Point 2: Unequal Equities
The Average investor takes home about 1/2 to 2/3rds of the returns of the investments they invest in.
The Average Equity Fund investor’s lifetime return is two-thirds to one-half of the investments the investor invests in.
Let me say that again. The Average Equity Fund investor, those investing in funds or stocks, has had a real lifetime return of between two-thirds to one-half of the returns of those same investments that they have owned.
The Average Equity Investor significantly underperforms not only investments in general but their investments.
All this data is from the 2020 Quantitative Analysis of Investor Behavior by Dalbar. You can purchase the full report on Dalbar’s site for $1,500, or you can stay tuned to this podcast. We will reference this report often throughout this podcast and bring you the key points and how they relate to you.

(For the sake of keeping track while reading, I’ll round up or down on specific numbers. Look at the full chart for the exact numbers.)
For the 30 years ending December 2019, the Average Equity Fund Investor had an annualized return of about 5%.
Okay. Not bad.
If you had invested $100,000 30 years ago, your money would now be worth $450,000. You more than quadrupled your money without having to earn a dime of it. It’s the power of compounding.
30 years, 5% return, $100,000 turns into $450,000
But what about the market?
During that same 30 years, the S&P 500 Index had an annualized return of a hair under 10%.
That is twice the return of the Average investor! Double!
The average investor does 5%, equity index does 10%. You can’t invest directly into an index, but some funds follow it. Even with some fees in there, you’re still obtaining twice the investor’s percentage return.
Investment returns trounce investor returns 2-to-1 over 30 years.
Let’s go back to dollars because our minds are not wired to understand compounding percentages intuitively. $100,000 over 30 years at 5% is $450,000 investor return. So, we would expect $100,000 over 30 years at 10% to be $900,000, right? Double the return, double the result.
Nope.
$100,000 invested for 30 years at 10% is $2 Million!
You should be picturing Dr. Evil from Austin Powers saying, “One Meellion Dollars.” Then double that.
$2 Million. That is not merely 4.5 times our starting amount, which is what the Average investor got. It is 20 times more! Or four times more than the average investor.
The gap in returns between the Average Equity Investor and equities as an investment on $100,000 over 30 years is $1.5 Million.
Said again, the behaviors of the average investor over their lifetime cost them, literally, millions of dollars.
Carl Richards calls this difference between the investor Returns and investment Returns “The Behavior Gap,” and he had a great book on the subject by the same name.
Why is behavior the reason? Because if left to themselves, investments do very well. It is when you insert the investor into the equation that the returns diminish.
What are these behaviors that so wreck the Average investors Return?
There are many, but there are four in particular that I believe are particularly devastating. I call them The Four Horsemen, and Episode 4 will cover those in detail. Stay tuned.
This gap between investor and investment returns is why I believe the focus on investment returns is misguided. It distracts investors from what is essential, halving their average returns and quartering their real dollar return over 30 years.
And while there is little to nothing that can be done to improve investment returns, there is a lot that can be done to enhance investor returns. We will cover those throughout the podcast and cover what I call the Seven Pillars of Victory in Episode 7.
The investor gets about 3/4ths of what the market gets over ten years, 2/3rds over 20 Years, and 1/2 over 30 years.
Time Magnifies the margin between success and failure. You can’t always tell over a 2- or 3-year period when you’ve been underperforming. Over an extended period, 10, 20, or 30 years, you begin to see the margin between what you have gotten and what you could have gotten.
While the Behavior Gap is the largest over 30 years, I find it interesting that THERE IS NO PERIOD WHERE THE AVERAGE INVESTOR OUTPERFORMED THE MARKET. Again, look at the table.
Even over the ten years from 2010 to 2019, in one of the most significant bull markets of all time, when you could not help but do well in equities, investors Returns lagged investment returns by 4%.
$100,000 invested over ten years?
Investor: $255,000
Investments: $385,000
That is a difference of $130,000 over ten years on $100,000 invested.
Remember, we are not comparing people who invested in CDs and Bonds to people who invested in equities. We are comparing people who invested in the very thing they underperformed.
When it comes to equities, the returns on not equal. Investments trounce investors.
You may be thinking, “Okay, that makes sense with how risky stocks are. But what about bonds?”
Let’s leave aside the notion of stocks as “risky” for now, for we will cover that a bit in Episode 2 and extensively in a dedicated episode later this season. The question about bonds, and we’ll lump in other fixed income investments such as CDs, Treasury Bills, and the like, brings me to the last point of this podcast.
Point 3: Wrong Fixation
The average investor LOSES money in “safe” fixed income.
We often are told, and thus believe, that fixed income investments are “safe.” (Again, we’ll cover what this “safe” means in a future episode.) We know they are less volatile and produce lower long-term returns. But you should suspect by now that the returns of even fixed-income investments cannot be the same as that of fixed income investors.
For years, I had known about the behavior gap between investor and investment returns when it came to equities. But even I was not prepared for what I saw in Dalbar’s 2020 report.
For the 30 years rolling in the report, the Bloomberg-Barclay’s Aggregate Bond Index had averaged 6%. That’s not bad. It’s better than the investor return of equities! (Note that with interest rates dropping significantly, the 10-year return of the Bond Index is about half that. Don’t expect 6% bond returns anytime soon.)
$100,000 invested over 30 years: $600,000. Very respectable. And for significantly lower volatility, perhaps even preferable to equity investor returns.
We know investor behavior lowers returns. We don’t know why yet; that will be covered in Episode 4. But we know that data is clear that it does. So, what is the effect of investor behavior on fixed income returns?
For the 30 years ending December 2019, the Average Fixed Income Fund Investor return was 0.38%. Zero point three eight percent.
Less than one half… of one percent.
Congratulations, your $100,000 grew to a whopping $112,000 over 30 years. Meanwhile, inflation pushed what you used to pay $100,000 for to $205,000.
As the average investor, you lost $93,000 in real dollars over thirty years investing in “safe” investments.
To fixate on the investment return of fixed income while ignoring the behaviors of real investors is WRONG. We have, in this country, a wrong fixation on fixed income.
So, what is the point of all this, other than to be depressing?
I hope that sharing all this with you would begin to challenge the ideas you believe about investing. I hope that we would start to focus less on investment returns, which no one can control, and focus on investor returns, which are very controllable!
I want to leave you with an action item as we sign off here. One action that you can take as a result of all this.
The action is this. Subscribe to the Podcast. At the time of publishing, we have 52 episodes planned for the podcast. Each will be interesting and a little unconventional. There will be more ideas here that challenge what you think and believe, but in a way that can change your life for the better.
Episode 2 is called the Principal Problem. We’ll discuss the Principal Problem that we are trying to solve for retirement planning. We’ll share what it is and what it is not. Some have described the message as a “Total Paradigm Shift.”
Episode 3 is called “Belief over Knowledge.” Why is a topic like this even in a retirement podcast? This topic is not merely an aspect of personal finance. It is the aspect upon which every financial decision you make is based. It is so important that I made it episode 3 out of 52 planned episodes.
As noted earlier, the two more episodes are on the Four Horsemen, the Behavioral Mistakes most responsible for these abysmal investor returns, and the Seven Pillars that you should build your financial life on to defeat those horsemen.
It is going to be a fantastic season on the RetireMentorship Podcast. I hope you stick around.
It’s not what we think we know that counts. It’s what we believe and do.
This is Freeman Linde, signing off.
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 the opinions of the people expressing them. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. RetireMentorship is not affiliated with any Registered Investment Advisor, Broker-Dealer, or other Financial Services Company.
- Equity benchmark performance and systematic equity investing examples are represented by the Standard & Poor’s 500 Composite Index, an unmanaged index of 500 common stocks generally considered representative of the U.S. stock market. Indexes do not take into account the fees and expenses associated with investing, and individuals cannot invest directly in any index. Past performance cannot guarantee future results. Bond benchmark performance are represented by the BloombergBarclays Aggregate Bond Index, an unmanaged index of bonds generally considered representative of the bond market. Indexes do not take into account the fees and expenses associated with investing, and individuals cannot invest directly in any index. Past performance cannot guarantee future results. Average stock investor, average bond investor and average asset allocation investor performance results are based on a DALBAR study, “Quantitative Analysis of Investor Behavior (QAIB), 2020.” DALBAR is an independent financial research firm. Using monthly fund data supplied by the Investment Company Institute, QAIB calculates investor returns as the change in assets after excluding sales, redemptions and exchanges. This method of calculation captures realized and unrealized capital gains, dividends, interest, trading costs, sales charges, fees, expenses and any other costs. After calculating investor returns in dollar terms, two percentages are calculated for the period examined: Total investor return rate and annualized investor return rate. Total return rate is determined by calculating the investor return dollars as a percentage of the net of the sales, redemptions, and exchanges for the period.