Two business men shouting through megaphones

The investment return gap between the average U.S. equity fund investor and the S&P 500 widened substantially in 2021 compared to previous years, a new report suggests.

According to Dalbar’s 2022 quantitative analysis of investor behaviour report, the average equity fund investor returned 18.39% compared to the 28.71% registered by the S&P 500 for the 12 months ending Dec. 31, 2021.

That 10-percentage point “investor gap” is significantly wider than the three-year gap of 4.51 percentage points and is the third largest annual gap since 1985, the report noted, when Dalbar’s analysis of investor behaviour began.

The average U.S. fixed-income fund investor finished 2021 with a -1.55% return versus a -1.54% return with the Bloomberg Barclays Aggregate Bond Index.

The report also noted the average equity fund investor continued to be a net withdrawer of assets in 2021, for the sixth year in a row. This type of investor has maintained an asset allocation of about 70% equity and 30% fixed income since 2017.

While the average equity fund investor outperformed the S&P 500 in the first two months of 2021, they only did better than the index in two of the remaining 10 months afterwards. This type of investor performed best in value funds, the report noted, with the average small-cap value fund investor being the top performing size and style investor, earning 30.38%.

Average active equity fund investors experienced a larger investment return gap than average equity index fund investors, the report found. The former had an 18.18% return in 2021 compared to a 28.71% return for the S&P 500. The latter had a 23.44% return, a gap of 5.27%. (Active vs. passive comparisons were not provided for fixed-income investors.)

Although the report didn’t draw a causal link between the investment return gap and the average equity fund investor’s behaviour, it did lay out the different types of investor behaviour that lead to flawed decision-making.

Among these investor behaviours are “optimism,” “loss aversion,” and “narrow framing.”

“Optimism” refers to a belief that good things happen to you and bad things happen to others. “Loss aversion” is when an investor expects to find high returns with low risk. “Narrow framing” is when an investor makes decisions without examining all implications.

“The best financial professionals double as behavioural finance coaches of their clients,” Dalbar said in the report. Financial advisors who can help clients overcome these biases can help them make better investing decisions. The report also emphasized the prudence of a long-term, buy and hold approach, and said that advisors could help clients understand the folly of measuring investment success against statistical benchmarks.

The Dalbar report used data from the Investment Company Institute’s, S&P’s and Bloomberg Barclay indexes as well as proprietary sources to compare mutual fund investor returns to a set of benchmarks. The report spans Jan. 1, 1985 to Dec. 31, 2021 and uses mutual fund sales, redemptions and exchanges each month as the barometer of investor behaviour.