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Average Investor 20 Year Return Astoundingly Awful

The average investor's 20 year annualized return is astounding simply because of how awful it was.

According to an analysis by Dalbar, the average investor earned 2.1% over the twenty year period ended Dec. 31, 2011. How did this compare to other asset classes?

To make it very simple, the S&P 500 returned 7.8%, while the Barclays Capital US Aggregate Bond Index returned 6.5% over the same time period. A 50/50 blend of these two asset classes would have yielded a nominal annualized return of 7.2%. Wait, it gets even worse.

After including inflation, the average investor got a negative real return. Inflation (CPI) grew at an annualized rate of 2.5% during the period. So the average investors' net real return was -0.4%. The average investor is not very good at capturing the market return of a simple balanced portfolio, never mind outperforming it.

So how can you use this information?

First, a smart investor does not follow the crowd as it moves in herd like fashion. Remember the tech bubble? So what have mutual fund investors been doing the last several years? Since 2006, U.S. mutual fund investors have been moving out of U.S. equities and into bond funds. During the height of the financial crisis and panic of 2008 this would not have been a bad strategy. However, the S&P 500 has risen 115.9% since its March 2009 low. Meanwhile, individual investors continue to redeem stock funds and move into bond funds. The average investor is setting themselves up for a very rude awakening when interest rates begin to rise: Bond funds are not the safe haven many investors think they are.

What is the solution to getting better returns? For the average investor it is designing an asset allocation that makes sense for them. The allocation should be designed based on their time horizon and risk tolerance. I know this sounds simple, yet how many investors actually bother to do this? Based on the astounding 20-year return track record of the average investor, I would guess not too many have implemented or maintained an asset allocation strategy. They may have started with an asset allocation plan, but when the markets got volatile they bailed out at the bottom.

Finally, a disciplined investor can use asset allocation to easily beat the average investor and more importantly stay ahead of inflation. Sometimes simpler is better.

--By Michael Maye

Maye is the founder and president of MJM Financial Advisors (, a registered investment advisory firm in Berkeley Heights, N.J. He is a member of the National Association of Personal Financial Advisors (NAPFA) and has been a speaker covering tax topics at NAPFA's national and regional conferences. Maye has also been a frequent contributor to the Star Ledger of New Jersey's "Biz Brain" and "Get With the Plan" articles. In addition to NAPFA, he is a member of Financial Planning Association, American Institute of Certified Public Accountants, New Jersey State Society of CPAs and the Estate Planning Council of Northern New Jersey.