Despite another roaring bull market, average equity investors were tripped up by their own bad behavior in 2024, which caused them to underperform the S&P 500 by a whopping 848 basis points, according to market research firm Dalbar Inc.’s annual “Quantitative Analysis of Investor Behavior Report.”

“Whether through late re-entries, poor rebalancing, or tactical moves that missed rallies, the end result was the same: more effort, less return,” the Dalbar report stated. “Even in a favorable market, behavioral missteps continued to erode real returns.”

The 848-basis-point gap is the fourth-largest underperformance among equity investors since Dalbar began tracking investor behavior trends in 1985. The only years with larger gaps were 1995, 1997 and 2021. It also extended average equity investors’ losing streak to 15 consecutive years of underperforming the S&P; 2009 was the last time they beat the index.

While the S&P 500 soared again last year to the tune of 25.02%, the average equity fund investor’s gain was just 16.54%. While that is nothing to sneeze at, the wide chasm indicates that the average investor missed out on a wave that could have boosted their 2024 gains by more than 50% had they matched the S&P, according to the report: “Many investors either got spooked by the headlines or tried to optimize themselves into underperformance.”

According to the Dalbar report, withdrawals from equity funds occurred in every quarter, with the largest outflows during the third quarter, just before a major rally.

“This behavior has been a persistent feature of investor activity and contributed to lower realized returns for many in 2024,” the report stated. According to the report, “investor behavior is not simply buying and selling at the wrong time. It is the psychological traps, triggers, and misconceptions that cause investors to act irrationally. That irrationality leads to buying and selling the wrong time.”

The report cited nine types of behavior that “plague” investors, often correlating with their personal experiences and unique personalities:

• Loss aversion: expecting to find high returns with low risk;
• Narrow framing: making decisions without considering all implications;
• Mental accounting: taking undue risk in one area and avoiding ration risk in another;
• Diversification: seeking to reduce risk, but simply using different sources;
• Anchoring: relating to familiar experiences even when inappropriate;
• Media response: the tendency to react to news without reasonable examination;
• Regret: treating errors of commission more seriously than errors of omission;
• Herding: copying the behavior of others, even in the face of unfavorable outcomes; and
• Optimism: the belief that good things happen to them, while bad things happen to other people.

Fixed-income investors also underperformed in 2024, losing 1.07% for the year, compared with the Bloomberg U.S. Aggregate Bond Index’s 1.25% gain. Dalbar reported that even though fixed-income investments declined, investor contributions to bond funds increased in 2024.

According to Dalbar, the report used data from the Investment Company Institute, Standard & Poor’s, Bloomberg and Barclays indices, as well as proprietary sources, to compare mutual fund investor returns to a set of benchmarks. From the beginning of 1985 through 2024, the study has used mutual fund sales, redemptions and exchanges each month to gauge investor behavior.