The following conclusion was reached according to the Dalbar Study, which originated in 1995 in the United States, to determine the profitability of trading for the small investor of mutual funds (unit trusts).
An investor who bought an S&P 500 index fund would have earned 11.9% annually for the twenty years from 1986 through 2005. The average equity investor, however, earned a 3.9% annual return. Investors who hold their investments have the potential for greater success than those who try to “time” the market.
The Buy & Holders will love the results as it "proves" that buying and holding is better than trying to switch to so-called "hot" funds. However, one should not just buy and hold mindlessly.
There are a few reasons for the underperformance of the average equity investor:
1) Investors poured money into recent "hot" funds after hearing and seeing huge gains.
2) The fund managers are then unable to successfully invest the large cash inflows.
3) Investors selling away the funds after a few quarters of tepid performance.
To improve one's chances of coming out on top, my recommendation is to buy a low cost passive fund. Not to mention returns, a high cost fund will immediately burn a hole in your pocket.
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