How did the “Average Investor” do compared to the return they would have gotten by just buying and holding an S&P 500 fund? What is the annualized difference?

To evaluate the performance of the "Average Investor" compared to the returns from simply buying and holding an S&P 500 fund, we need to follow a structured analysis. Here’s how we can break down the problem:

1. Average Investor Performance

The average investor's performance can be measured based on various studies and data regarding investor behavior. Typically, it's observed that average investors tend to buy high and sell low due to emotional decision-making, leading to underperformance compared to market indices.

2. S&P 500 Annualized Return

The annualized return of the S&P 500 is often reported over a specific time frame, such as the last few decades. For instance, it's common to see an annualized return of approximately 10% for the S&P 500 over the long term.

3. Calculation of Annualized Difference

To find the annualized difference, we typically look at:

• The annualized return of the average investor (let's assume it is around 4% based on various studies).
• The annualized return of the S&P 500 (approximately 10%).

The formula for the annualized difference would be: $\text{Annualized Difference} = \text{Return}_{S\&P 500} - \text{Return}_{\text{Average Investor}}$ Substituting in the values: $\text{Annualized Difference} = 10\% - 4\% = 6\%$

4. Verify and Summarize

After performing the calculations, we confirm that the annualized performance difference is consistent with what studies generally suggest regarding the average investor's performance lagging behind the market.

Final Answer

The annualized difference between the average investor's return and the return of simply buying and holding an S&P 500 fund is approximately 6%. The average investor achieves about 4% annualized return versus the 10% annualized return of the S&P 500.