Countless studies on the capital markets have analyzed the rates of return of specific asset classes over and over again. These studies show that stocks typically outperform all other asset classes over the long haul.

While these studies on the performance of capital markets are of interest, what really matters is how investors are faring when they participate in these markets. Few studies address the subject of the actual performance of investors relative to the performance of the market.

Dalbar Inc., a research firm for the financial services industry, took aim at this very question. Just how have investors done in this last big bull market? The resulting study, called Quantitative Analysis of Investor Behaviour, came up with some remarkable statistics.

The study period covered the years 1984 to 2002. The stock market, represented by the S&P 500 index, earned an impressive 12.2% compounded over this time period. The US long bond market came in with a solid 11.9% compounded. The equity investors in the study, however, earned a mere 2.57% over the same time period.

The comedian Dennis Miller offers the following sage observation:

“A bear market is when your portfolio goes down when the market is going down, a bull market is when your portfolio goes down when the market is going up.”

The Dalbar study blames market timing for the lacklustre results for individual investors. The equity fund investors involved in the study bought funds at market peaks only to sell at market bottoms. The buying and selling at inopportune times was repeated enough to truly compromise their results.

Many investors will seek to time their entry and exit into the market based on the commentary received from very sophisticated investment strategists. Yet consider the following results compiled by SmartMoney.com since 1997. You will see names of some of the most well-known market strategists in the world. The batting average beside their name represents the accuracy of their calls on market direction:

It appears that even the most knowledgeable people on Wall Street have little idea of where the market will go in the short term.

Investors can take a lesson from all of this research: market returns over time are exceptional returns. Attempts to time the market are more likely to hurt rather than help your long-term performance.

Investors can increase their confidence by constructing portfolios that have a high probability of giving market returns. Those same portfolios, held through the media frenzies that surround capital markets, will offer investors exceptional results.