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Dalbar Study: Fund Returns Often Depend Upon You

Q: In a recent Wall Street Journal editorial by John Bogle, founder and former CEO of The Vanguard Group, I was shocked to learn that the average return for equity fund investors between 1984 and 2002 averaged only 2.7 percent per year. Even more surprising: A $1000 investment over that same time frame would be worth only $660. What's up with that and those horrible returns?
-L. Montanez, Lake Worth, FL

A: Good question. I was also shocked by the piece ("The Emperor's New Mutual Funds, The Wall Street Journal, July 8, 2003, page A16), and the paltry returns it states investors had. Here's the story behind it.

Bogle has made the mutual fund investment arena very conscious of the drag fund expenses make on an investor's return. The fund family he created offers some of the lowest mutual fund annual expenses in the industry. In the Journal piece, he pointed out that, while the S&P 500 Index has had a 12.2 percent average annual return since 1984 (through year-end 2002), the average equity fund has had only a 9.3 percent average annual return.

The reasons for that nearly 3 percentage point---or 300 basis point--- discrepancy was caused by the cost and expense charges mutual funds incur. Those costs include expense ratios, turnover costs, etc. which can run as high as 3 percent per year. Subtract that 3 percent from the 12.2 percent average return of the S&P 500 Index, and you can see where the average return of 9.3 percent comes from.

More importantly, Bogle noted that the actual returns the average equity fund investor received between January 1984 and December 2002 averaged a measly 2.7 percent per year. That performance figure was based on a study recently released by Dalbar, Inc., titled "Quantitative Analysis of Investor Behavior".

Dalbar, a Boston-based financial services market research firm, conducted the first survey of this type in 1993. Methodology for it includes looking at real investor returns; monthly cash flows in and out of both stock and bond funds; retention rates as in the average length of time shareholders remain invested in a fund; and the volume of sales, redemptions, exchanges in and exchanges out of those types of funds.

I asked Dalbar's president, Lou Harvey, what the average individual investor can take away from the study's startling results: "First of all, the returns that you make on a mutual fund depends a lot more on the market and your actions than it does on the fund manager."

Harvey explains that, while fund managers can beat the markets by marginal returns, those market returns aren't available to people who buy their fund shares when the market---and their fund type--- is hot and sell them when things have cooled down.

"So, one has to focus on the market as well as what one is doing in the market," he says.

He also says that there is overwhelming evidence that panic selling typically means losing money. And, to be careful not to get caught in buying hyped funds when those sectors of the market are flying high. "During the market bubble, the distributors and sellers of mutual funds seized on the vulnerability of consumers," Harvey says. " And nothing could underscore that more that the fact that people are trying to sell bond funds right now when any rational person should be able to figure out that bond funds are headed nowhere but down."

Additional findings from the Dalbar report show that because investors switch investments, their equity fund returns have been lower than inflation: The rate of inflation between 1982 and 2002 averaged 3.14 percent annually, while the average equity fund only returned earned 2.57 percent annually.

Regarding bond funds, the survey showed that the average bond fund investor earned 4.24 percent annually compared to the long-term government bond index return of 11.70 percent.

Bottom line: Fund expenses along with your investment behavior have more to do with the kind of returns you'll get from your mutual fund investments than what's going on in the market.


Dian Vujovich is a nationally syndicated mutual fund columnist, author of a number of books including Straight Talk About Mutual Funds (McGraw-Hill), and publisher of this web site.

To read more articles, please visit the column archive.

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