Why Investors Underperform the Stock Market

Investing is supposed to build wealth over time, right? So why do so many investors fail to keep up with the market? The DALBAR Quantitative Analysis of Investor Behavior (QAIB) report has been answering this question for decades. The findings are clear: the average investor consistently underperforms major market indices.

Let’s break down why this happens, what mistakes investors make, and how you can improve your own investment performance.

The DALBAR QAIB Report: What It Reveals About Investors

The DALBAR QAIB study measures how investor behavior affects returns. The key takeaway? Investors sabotage their own success. By making emotional decisions—buying high and selling low—they miss out on the long-term growth of the market.

Long-Term Investor Performance vs. Market Benchmarks

According to the most recent DALBAR study (2022):

• The average equity fund investor earned 6.81% annually over a 30-year period ending December 31, 2021.

• The S&P 500 returned 9.65% annually in the same period.

• Fixed income fund investors performed even worse, earning -0.14% annually, compared to the 4.55% return of the Bloomberg Barclays Aggregate Bond Index.

• Inflation averaged 2.50%, meaning many investors actually lost purchasing power over time.

That’s a 2.84% gap for stock investors and an even larger shortfall for bond investors. Over decades, that difference means missing out on hundreds of thousands of dollars in potential wealth.

(Stat Source: Atlas Financial DALBAR Report)

Why Do Investors Underperform?

Most investors don’t fail because of bad stock picks. They fail because of emotional and behavioral mistakes. Here’s why:

1. Chasing Performance

Ever heard someone say, “This stock is skyrocketing! I have to buy it now!”? That’s called herding behavior—when investors rush into an asset just because everyone else is. But by the time they buy in, the price is often inflated.

Example: Investors piled into tech stocks in 2021, only to suffer huge losses in 2022.

2. Selling at the Worst Time

Fear-driven selling is a wealth killer. In every market downturn, investors panic and sell low. But historically, the market has always rebounded.

Example: Many investors dumped stocks in March 2020 when the market crashed. By the end of 2020, the S&P 500 had fully recovered, but those who sold missed out.

3. Loss Aversion

Losing money hurts more than gaining money feels good. This psychological bias makes investors overly cautious, leading them to hold too much cash or invest in low-return assets.

4. Market Timing Mistakes

Trying to predict market moves rarely works. DALBAR’s data shows that investors who jump in and out of the market often miss the best-performing days, which drastically reduces long-term returns.

5. Failure to Diversify

Many investors put too much money into a few stocks, sectors, or even a single company. Diversification spreads risk and smooths returns over time.

How to Avoid Common Investing Mistakes

The good news? You can improve your investing performance by making a few smart changes:

1. Stay Invested for the Long Haul

• The S&P 500 has averaged 9.65% annual returns over 30 years. Investors who stayed in the market reaped those gains.

• Missing the 10 best days in the market over a decade can cut your returns in half!

2. Use a Systematic Investing Approach

• Dollar-cost averaging (DCA): Invest a fixed amount at regular intervals to reduce risk.

• Rebalancing: Adjust your portfolio yearly to maintain your target mix of stocks and bonds.

3. Control Your Emotions

• Don’t panic-sell in a downturn. Markets recover.

• Ignore media hype and avoid “hot stock” tips.

4. Think Long-Term

• Set clear goals for 10+ years.

• Consider a few market index funds or ETFs for broad market exposure.

FAQs About Investor Behavior & Returns

1. What is the biggest mistake investors make?

The biggest mistake is buying high and selling low due to emotional decision-making. Investors chase hype and panic-sell in downturns, leading to lower returns.

2. How can I improve my investment returns?

Stay invested, use diversified index funds or ETFs, practice dollar-cost averaging, and avoid emotional trading.

3. Why do individual investors underperform the S&P 500?

Most investors try to time the market, react to short-term news, and don’t stick to a long-term strategy.

4. Should I manage my own investments or hire an advisor?

If you struggle with emotional decisions, an advisor can help you stay the course and make rational investment choices.

5. What’s the best way to build long-term wealth?

Start early, invest consistently, and stay in the market through ups and downs.

Final Thoughts

The data is clear: Most investors underperform the market, but it’s avoidable. The key is to control emotions, avoid short-term thinking, and stick to a well-diversified, long-term investment strategy.

Want to boost your investment performance? Make a plan, stay disciplined, and let time work in your favor.