Here are some facts that might make many fund investors question why they have chosen to invest in funds at all. According to John Bogle, former CEO of Vanguard Funds, one of
most trusted authorities on investing in mutual funds and a strong advocate for ordinary investors, such investors typically get poor returns on their investments. How poor?
Between 1984 and 2002, average stock fund investor made just 2.7% per year on their fund investments! Hard to believe isn't it? Yet this is for a period during which S&P Stock 500 Index returned 12.2%, a -9.5% shortfall!
Expressed somewhat differently, had equity investor invested $1000 buy and hold in average equity fund beginning in 1984, their investment would have risen in value by $4420 by close of 2002, for a 9.3% return. But had he invested $1000 in S&P 500 Stock Index instead beginning in 1984, his profit would have been $7910.
But, folks, here's biggest part of problem: Since most fund investors tend to buy and sell as a function of mass psychology, which usually turns out to be wrong, average equity fund investor does far worse over years than long-term results had he merely bought and held his funds. So, if we track performance of typical investor's $1000 made at start of 1984, his profit would be a mere $660, or a shocking one-twelfth of that of $7910 shown above for S&P Index.
How does Bogle account for this tremendous shortfall by average investor? He attributes first 3% of annualized loss to management fees, costs of higher than 100% average turnover of stock portfolios, and other expenses incurred by average fund. As a result of such hefty costs, typical fund earns, as shown above, nearly 3% less than Index.
And what about bigger 6.6% annual difference between 9.3% return of average fund and 2.7% earned by average investor in those funds? Bogle attributes it to too many fund choices, great majority of which are too undiversified to meet typical investor's needs. Such, along with emotions of "greed and fear", create an atmosphere whereby people are often tempted to make wrong choices at wrong times; that is, they are too avid to buy when they should be being more cautious, and too prone to sell out when things have been going poorly for quite a long time rather than selling just a small portion of their holdings, as I have advocated in my writings. (Incidentally, several of very kind of investment problems reported by Bogle have been dealt with in previous articles on my own not-for-profit website.)
