The Infamous Dalbar Study: The Cost of Human Emotion in Investment Returns

June 18, 2024  |  Doug Frawley, CFP®, CPA

Investing can be an emotional rollercoaster, marked by periods of euphoria and despair.

These emotional reactions can often lead to suboptimal investment decisions that significantly impact long-term returns.

The Dalbar, Inc Quantitative Analysis of Investor Behavior (QAIB) study provides a sobering look at how individual investors often underperform compared to the broader market indices due to poor timing and behavioral biases.

Overview of the Dalbar Study

Dalbar, Inc. is an independent financial services research firm that has been analyzing investor behavior and its impact on investment returns for several decades.

The Dalbar QAIB study is one of their flagship reports, and it examines the returns achieved by average mutual fund investors versus the returns of the market indices over extended periods, typically 20 years.

Key Findings of the Dalbar Study

1. Significant Underperformance: The most striking finding of the Dalbar study is the substantial gap between the returns earned by the average individual investor and those of the market indices. Over a 20-year period, individual investors often earn significantly lower returns than the market.

2. Quantified Performance Gap: For example, the study has consistently shown that over a 20-year period, the average equity fund investor underperforms the S&P 500 by a wide margin. In many editions of the study, the annualized return for the average equity fund investor has been around 4-5%, while the S&P 500 has posted annualized returns closer to 9-10%. This discrepancy can result in a significant difference in wealth accumulation over time.

3. Impact of Timing and Behavior: The primary reason for this underperformance is poor timing decisions driven by emotional reactions to market movements. Investors often buy high and sell low, in contrast to the market’s natural tendency to grow over the long term. Dalbar attributes this behavior to several psychological factors, including fear, greed, and the tendency to chase past performance.

4. Fixed Income Underperformance: The study also highlights significant underperformance in fixed-income investments. The average fixed-income investor typically earns returns well below those of benchmark bond indices. This underperformance is often due to similar behavioral biases, such as reacting to interest rate movements and economic news.

5. Impact of Market Volatility: Market volatility exacerbates poor investor behavior. During periods of high volatility, such as the dot-com bubble burst, the 2008 financial crisis, or the COVID-19 pandemic, many investors panic and make hasty decisions that lock in losses and miss subsequent recoveries.

Behavioral Biases Highlighted by the Dalbar Study

1. Loss Aversion: Investors are generally more sensitive to losses than to gains. This can lead to fear-driven decisions, such as selling during market downturns to avoid further losses, even though holding on might lead to recovery and growth.

2. Herding: Many investors follow the crowd, buying assets that have recently performed well and selling those that have performed poorly. This behavior often leads to buying high and selling low.

3. Overconfidence: Overconfidence can cause investors to overestimate their ability to predict market movements and time their trades effectively. This often results in frequent trading and higher transaction costs, reducing overall returns.

Implications for Investors

The Dalbar study underscores the importance of disciplined investing and the dangers of emotional decision-making. Here are some practical takeaways for individual investors:

1. Adopt a Long-Term Perspective: Focus on long-term financial goals rather than short-term market fluctuations. A long-term perspective can help mitigate the impact of emotional decisions.

2. Diversification: A well-diversified portfolio can reduce the risk of significant losses during market downturns and provide a more stable return over time.

3. Regular Rebalancing: Periodically rebalancing your portfolio can help maintain your desired asset allocation and reduce the temptation to chase performance.

4. Stay Invested: One of the most effective ways to achieve long-term returns is to stay invested through market ups and downs. Time in the market typically beats attempts to time the market.

5. Professional Advice: Consulting with a financial advisor can provide valuable guidance and help keep emotions in check. Advisors can offer objective perspectives and strategies to navigate market volatility. An excellent financial advisor will be well versed in behavioral finance and primarily serves as your behavioral couch- helping protect you from yourself. In the words of Warren Buffet “It won’t be the economy that will do in investors- it will be investors themselves.”


The Dalbar study provides a stark reminder of the impact of human behavior on investment performance.

By understanding the common pitfalls that lead to underperformance, investors can adopt strategies to mitigate these risks and improve their long-term financial outcomes.

The key to overcoming the “behavior gap” lies in maintaining discipline, leveraging diversification, and adhering to sound professional advice.

By doing so, investors can better align their returns with those of the broader market, enhancing their chances of achieving their financial goals.

Until next time,

If you’ve been considering hiring an advisor to help guide you through the ever-changing financial landscape, take your first step today by scheduling a free consultation with one of our experienced team members. There’s no risk in exploring if we’re the right fit for your financial goals. Contact us now.

Doug Frawley, CFP®, CPA

As a Senior Financial Advisor at Avalon Doug Frawley is committed to fostering enduring relationships with clients through consistent communication, insightful education on market dynamics, and unparalleled service. Doug has been a fiduciary for over a decade- always putting his clients' best interests first. In fact, he started his journey as a financial professional as a fiduciary from day one as a Certified Public Accountant.
Get Our FREE Guide

How to Find the Best Advisor for You

Learn how to choose an advisor that has your best interests in mind. You'll also be subscribed to ADAPT, Avalon’s free newsletter with updates on our strongest performing investment models and market insights from a responsible money management perspective.

Avalon_NewGradient_24Feb22 copy