How Investor Behaviour Undermines Long-Term Success
Some people view the stock market as a casino, trying to outsmart it or reacting to every market fluctuation. Dalbar Inc.'s annual Quantitative Analysis of Investor Behavior (QAIB) report highlights a stark reality: the average investor’s behaviour undermines their financial goals.
Independent investment research firm Dalbar has been publishing its annual QAIB report for over 30 years. Focused on the U.S, it studies investor performance in mutual funds (or what we call managed funds in Australia).
The 2025 edition showed that whilst the S&P500 returned +25.02% in 2024, the average U.S equity investor achieved +16.54% - or 34% less than the market return.
Why does this happen? It can be a range of factors, from thinking in late 2023 the market is overpriced so people sell (and the market keeps going up) to moving funds into stocks or funds that have done well in the past, only to find they don’t continue their strong returns going forward.
The compound effect of this behaviour over time is significant. The 2025 QAIB report concluded over the 20-year period to 31 December 2024, the average U.S equity investor returned 9.24% pa compared to the S&P500 return of 10.35% pa. The graph below shows the compounding impact of this annual -1.11% underperformance on the growth of $1 million over 20 years, compared against inflation and term deposits[i].
The S&P market portfolio is worth +22% more than what the average US investor achieved after 20 years.
Dalbar and other researchers consistently emphasise that investor behaviour during volatile markets plays a crucial role in long-term outcomes. Patience and a disciplined approach lead to more successful investment strategies.
The success of any investor’s financial plan is only as good as their ability to stick with it. Having a plan will help you navigate market uncertainties and make better infromed decisions. When markets fell in March 2025 after the announcement of US tariffs, each client’s financial plan enabled advisers at Lorica Partners to determine which clients should take advantage of lower stock prices and move cash into the stockmarket.
Since World War 2, stockmarkets have fallen -20% or more, on average, every six years. You need to plan for and expect market volatility as variable returns are never a surprise, even if the catalyst is. Investment outcomes are teh result of how you respond to an event, not just the result of the event itself.
Even the most self-aware can find it hard to manage their own responses to events. A good adviser acts as a behaviour coach to provide an objective view and help investors separate emotions from investment decisions. Moreover, great advisers can educate, communicate, set realistic financial goals and help clients deal with their responses even to the most extreme market events.
Over time, this behaviour compounds, as the Dalbar report shows.
Remember, investing in the stock market isn't gambling—it's a strategic partnership with global innovation and economic growth. Every investment is a vote of confidence in the world's leading businesses and their ability to generate sustainable returns over time.
Author: Rick Walker
Sources:
https://www.ifa.com/articles/understanding-investor-behavior-portfolio-performance
https://www.dalbar.com/news/pressreleases
[i] Bloomberg AusBond Bank Bill Index used as a proxy for term deposit performance.