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Mind the Gap.


I’ve never been to London, but my wife (world traveler that she is) found it kind of funny when they used this expression in London’s subway system. “Mind the gap” is a warning to subway riders to be careful when stepping across the gap between the platform and the subway.

I’m using it in a different context today. I’m referring to the gap between what the stock market returns, on average, as compared to the real returns that investors actually experience in their portfolios.

Since 1994, Dalbar (a company that evaluates, audits and rates business practices and such for the financial community) has published an annual report called the Quantitative Analysis of Investor Behavior (QAIB). QAIB measures the effects of investor decisions to buy, sell and switch into and out of mutual funds over both short and long timeframes. The results consistently show that the average investor earns less than mutual fund performance reports would suggest.

Dalbar’s 2011 QAIB covers the 20-year period that ended December 31, 2010. The report shows that stock investors earned 3.8%, on average. Over that same period, the S&P 500 returned 9.1%. Dang. That’s a big gap. The reason? Behavior. Simply put, from the QAIB: “Investment results are more dependent on investor behavior than on fund performance. Mutual fund investors who hold on to their investments are more successful than those who time the market.”

I know this gap seems too big to be true, but next musing I’ll give an illustration that will give it some more context.

Until then, as TMIMITW would say, “Stay in the market my friends.”