Wealth Accumulation
The past twenty years have seen a tremendous boom in the mutual fund industry. Major market indices, the S&P 500 and Aggregate Bond Index, have posted impressive returns. Yet the average investor has earned only a fraction of these results.
The two principal reasons for the shortfalls are:
Mutual fund performance reports assume a lump sum investment made once and then held for the entire period being reported. In reality this rarely happens.
Current industry practices are to report a mutual fund's returns based on a lump sum investment at the start of the time period being measured (one, three, five, ten years, etc.). While theoretically useful, there are virtually no investors that exhibit this type of behavior, making the published returns applicable to no one. Investors are buying and selling and they rarely have the discipline or the cash to make a single lump sum investment without the need to withdraw from, or desire to add to their investment.
Investors are often motivated by greed and fear - not by sound investment practices. Investors that procrastinate or try to time the market may earn nothing. Close examination of investor behavior reveals that many investors wait for markets to rise and then dump cash into mutual funds. A selling frenzy begins after a decline. Tracking the dollars going into and out of mutual funds over a given month compared to market performance proves this correlation. In addition, the allure of new or popular funds will also cause investors to switch. The announcement of fund closings also causes withdrawals. These behaviors lower investor returns, depending on when they occur.
Hypothetical $10,000 Investments - Comparison of Average Investor Behavior to Systematic Investing The first return depicts the growth of an average equity mutual fund investment when $10,000 in contributions are made in the same pattern as the average investor. This is done over the course of twenty years. The results are an ending value of $20,816. This is based on the S&P 500 index. The second illustration depicts the growth of a systematic investor to make $10,000 in contributions. This is done with monthly contributions over the course of twenty years.The systematic investor ending value is $35,439; representing an advantage of $14,623 or 70% over the 20 year period.
The 70% advantage of systematic investing shows the importance of consistency in wealth building. The benefit of dollar cost averaging shown here can be improved even more by starting immediately and increasing contributions over time.
Annualized Returns for the average investor show:
1 Year 3 Years 5 Years 10 Years 20 Years
Equities 12.6% 4.9% -1.8% 6.2% 3.7%
S&P 500 10.9% 3.6% -2.3% 12.1% 13.2%
Inflation 4.0% 2.7% 2.6% 2.5% 3.0%
Fixed Income 1.3% 1.9% 2.1% 2.4% 2.0%
Lehman 4.3% 6.2% 7.7% 7.7% N/A
The two principal reasons for the shortfalls are:
Mutual fund performance reports assume a lump sum investment made once and then held for the entire period being reported. In reality this rarely happens.
Current industry practices are to report a mutual fund's returns based on a lump sum investment at the start of the time period being measured (one, three, five, ten years, etc.). While theoretically useful, there are virtually no investors that exhibit this type of behavior, making the published returns applicable to no one. Investors are buying and selling and they rarely have the discipline or the cash to make a single lump sum investment without the need to withdraw from, or desire to add to their investment.
Investors are often motivated by greed and fear - not by sound investment practices. Investors that procrastinate or try to time the market may earn nothing. Close examination of investor behavior reveals that many investors wait for markets to rise and then dump cash into mutual funds. A selling frenzy begins after a decline. Tracking the dollars going into and out of mutual funds over a given month compared to market performance proves this correlation. In addition, the allure of new or popular funds will also cause investors to switch. The announcement of fund closings also causes withdrawals. These behaviors lower investor returns, depending on when they occur.
Hypothetical $10,000 Investments - Comparison of Average Investor Behavior to Systematic Investing The first return depicts the growth of an average equity mutual fund investment when $10,000 in contributions are made in the same pattern as the average investor. This is done over the course of twenty years. The results are an ending value of $20,816. This is based on the S&P 500 index. The second illustration depicts the growth of a systematic investor to make $10,000 in contributions. This is done with monthly contributions over the course of twenty years.The systematic investor ending value is $35,439; representing an advantage of $14,623 or 70% over the 20 year period.
The 70% advantage of systematic investing shows the importance of consistency in wealth building. The benefit of dollar cost averaging shown here can be improved even more by starting immediately and increasing contributions over time.
Annualized Returns for the average investor show:
1 Year 3 Years 5 Years 10 Years 20 Years
Equities 12.6% 4.9% -1.8% 6.2% 3.7%
S&P 500 10.9% 3.6% -2.3% 12.1% 13.2%
Inflation 4.0% 2.7% 2.6% 2.5% 3.0%
Fixed Income 1.3% 1.9% 2.1% 2.4% 2.0%
Lehman 4.3% 6.2% 7.7% 7.7% N/A
