Quantitative Analysis of Investor Behavior

April 5, 2023
Originally published JUNE 17, 2022

Last week we asked:  Is there a leak in your piggy bank?

We discussed returns and risks. Not surprisingly stocks supplied higher returns than bonds. The differences were astonishingly higher for stocks over the past 10, 20 and 30 years.

So, the first leak is not as much a leak as it is about a piggy bank that is not as full as it could/should have been.

The Second Leak

The second leak being discussed here is not earning as much in your investments as the benchmarks show. We believe your stocks should perform and compare to the S&P 500 and your bonds to the Bloomberg-Barclays Aggregate Bond Index. But when the returns are analyzed, both are below their benchmarks according to Dalbar.

For the past 30 years Dalbar has been studying investor returns in mutual funds. The study uses mutual fund sales, redemptions and exchanges each month as the measure of investor behavior. These behaviors reflect the “Average Investor.”  Based on the behavior, the analysis calculates the average investor returns for various periods. These results are then compared to the returns of their respective indices.

Investor returns have consistently fallen well below their expected returns over the past 30 years in the Dalbar study. The differences cannot be explained by expenses. The differences are far greater than fees and expenses.

Quantitative Analysis of Investor Behavior

The question is why?

It is my belief that investors who used to trade stocks too much now trade [switch] funds too much. Switches to and from different funds risk chasing trends and styles that often translates to buying high and selling low just as it does in individual stocks. The average holding period for each mutual fund investment was 4.36 years in 2021. In our opinion and that of Dalbar it is too short a holding period to efficiently realize appreciation. While the average investor may not realize it, switching equity funds is not a wise thing to do when the holding periods are too short.

A reasonable question might be:  What is a reasonable holding period. We would say 7-10 years.

The chart shows results for equity, income and allocation fund investors.  The results are not good, and they are especially bad for fixed income. Over a thirty-year period, the average fixed income investor earned only .34% while the Barclay’s Aggregate was up 5.29%.

Equity investors earned only 7.13% annually while the S&P 500 was 10.64% annually. While expenses are problematic, they account for less than 1% of mutual fund expense ratios. In fact, the average equity mutual fund expense ratio was .50% in 2020.

Dalbar has not reported results for passive index fund investors until recently. Not included in the chart is last year’s results for index fund investors. Investors in equity index funds in 2021 earned 23.44% but still significantly underperformed the S&P 500 return of 28.71%.

Once again, the question is why?

In my book, Investing Ahead, I discuss why it is so especially important to think long-term. Otherwise, too many events impacting the market seem to require short-term solutions.  If the investment strategy is not structured to endure over the long-term it will most likely fail. An investor that does not know what they will do before the event occurs is likely to ‘flail and fail”.

Dalbar studies strongly suggest too many investors act too often rather than stick to a long-term strategy. I might add I believe advisors can be part of the problem. They often advise clients to change strategies because they believe it is helpful.

The bear market that began 1/3/2022 was confirmed on 6/13/2022 when the S&P 500 closing price was more than 20% from its January all-time high.

We build portfolios that are designed to endure difficult periods in the market. We believe high quality companies that supply above average profits over the long-term are those that will give our investors the highest sustainable returns. We do not chase returns because we set up long-term positions confident we will be rewarded, and we have.


Thomas J. Curran, Founder & Chief Executive Officer

Our Financial Planning Process

At Curran we value service over sales and believe quality service yields happy clients. Below is our 4-step process (the first three steps at no cost to you).

Engage & Discover

A short introductory call for us to get to know one other. During this call we will discuss your financial goals, concerns and hopes for the future.

Goals & Data Gathering

In this meeting we will go over your current financial situation, take a deeper look at your goals, discuss your risk tolerances, and collect the data necessary to build a formal proposal.

Proposal & Evaluate

Based on our data gathering session, our Private Wealth Managers will present you with a custom proposal tailored to your needs. We encourage individuals to take the time to evaluate this proposal.


If you are comfortable with the proposal and choose to invest with Curran, our team will be there every step of the way assisting in opening the recommended accounts and facilitating all necessary parts of your onboarding process.