How Likely Is It That Retail Investors Underperform the Market?

How likely is it that retail investors underperform the market?

Sadly, the answer is very likely, almost a certainty. Emotional trading, lack of diversification, poor stock picking, and taxes all work against the average investor. But there’s good news: with the right strategies, you can avoid many of the common pitfalls and dramatically improve your long-term outcomes.

Let’s take a look at the hard facts.

The Numbers Don’t Lie

A Dalbar study found that over a 20-year period, the average retail investor earned just 2.6% annually, while the S&P 500 returned 7.8%. That’s a staggering 5.2% gap—and over 30 years, it adds up to nearly $864,000 in lost gains on a $100,000 investment.

Studies like the Dalbar study have been confirmed many times over.

Even professional money managers haven’t done much better. According to the SPIVA Scorecard, between 85% and 93% of actively managed equity funds underperformed the S&P 500 over 10 to 20 years.

Retail investors? They often have even fewer tools, less discipline, and more psychological hurdles to overcome.

Why Retail Investors Fall Behind

There are several major reasons retail investors tend to underperform:

• Emotional decision-making: Fear and greed can drive investors to buy at market highs and sell during downturns—exactly the wrong times to act.
• Fees and taxes: Even low-cost ETFs charge management fees between 0.03% and 0.2%. Add in capital gains taxes (up to 37%), and your returns shrink quickly.
• Poor stock selection: Between 1990 and 2018, over half of all U.S. stocks underperformed Treasury bills. Only about 1.3% of stocks were responsible for the majority of market gains.
• Lack of diversification: Many retail investors concentrate their portfolios in just a few stocks, increasing risk and volatility.

Put simply, the system isn’t designed to make it easy for individual investors to win. But that doesn’t mean you’re powerless.

5 Smart Ways to Improve Your Performance

If you’re serious about closing the performance gap, here are five proven strategies:

1. Invest in index funds or ETFs
   Broad market funds offer low fees and allow you to match the market’s performance with minimal effort. Buy and hold. Let time work for you.
2. Diversify your portfolio
   Don’t put all your eggs in one basket. Spread your investments across industries, asset classes, and regions to reduce risk.
3. Avoid emotional trading
   Use disciplined strategies like dollar-cost averaging to stay consistent, especially during volatile markets.
4. Think long-term
   Frequent trading not only racks up fees and taxes—it also makes it harder to stick to a plan. Stay focused on your long-term goals.
5. Stay educated
   Understand your own behavior and the psychological traps of investing. The more you know, the better your decisions will be.

Final Thoughts

Will these strategies make you the next Warren Buffett? Probably not. But they will give you a much better chance at matching the market, which is no small achievement over the long haul.