Myth #2: The 12% Return

Perpetuated by Financial Entertainers and Mutual Fund Managers

Summary: Repeated investment performance studies have shown that only a small percentage of individual investors can beat or even match the long term stock market returns. There are two main reasons for this. rate-of-return-thumbThe primary culprit is that most try to time the market. They add to their holdings during boom times and pull out when the market drops. Not only does this “Buy High & Sell Low” activity cause them to miss out on market rebounds, which it has always done following a major drop, but it also further reduces returns by using active managers, that charge significant fees and underperform the market.   A Dalbar study over a 20 period ending in 2010 showed the S&P 500 averaged a 9.1% return (including dividends) while the average US stock investor achieved only a 3.8% return.  

Consider the following headlines:

"bloomberg-logoThe Dow Plunged 634-76 points the first trading day after the U.S. downgrade for the biggest drop in two years. Over the next three days it rebounded 429.92 points, plunged 519.83 points and rallied 423.37 points." - December 15, 2011

"usatoday-thumbOnly 4% of U.S. Stock  Funds have beaten the actual performance of the S&P 500 over the last 10 years?" - December 18,2011

"thumb MNHeader-LeftHedge Funds Facing Worst Year Since 1990. Many investors are running to the sidelines." - December 9, 2011

"usatoday-thumbThe average diversified U.S. stock mutual fund has fallen 5.9% this year, vs. a 1.4% loss for the Standard & Poor's 500-stock index, says Lipper, which tracks the funds. Out of 8,036 funds, 7,399, or 92% are showing a loss." - December 18, 2011