Why Most People Shouldn’t Manage Their Money

Each year the research firm Dalbar issues a study of how the returns investors actually earned differ from the returns of popular indexes. The firm measures flows in and out of mutual funds to see when people actually were holding shares of the funds and earning the market returns. The results always are dismal for investors. They earn dramatically less than either market indexes or basic diversified funds of the indexes. The reasons are well-documented in the behavioral economics research. People are programmed to make bad financial decisions, and good investing takes a fair amount of knowledge and experience. Your average person is spending his or her time on other things. Here’s a summary of the latest reading from Dalbar.

A lot of the criticism of professional investment management addresses the question of whether stock fund managers outperform the stock indexes. That’s not the point. The issue is whether someone who uses a professional investment advisor achieves a higher return after fees than he would on his own. The research shows that most people would be better off with a professional’s help.

The verdict: People shouldn’t run their own investments. They really, really shouldn’t. Over the past two decades the S&P 500 returned 9.22% a year, on average. The average investor got just 5.02% a year, Dalbar found. That’s a huge gap, 45.6% lower.

In dollar terms, an investor who put $10,000 a year into the straight stock market ended up with $639,555. The investor who ran in and out of mutual funds on a whim got just $371,991. Nearly half of the money evaporates, thanks to the lower return.