Stocks have been a great investment in the last 80 years, with an average return of about 10 percent a year. But have investors in the stock market done as well as stocks? Surprisingly, the answer is no. The average dollar invested in the stock market in those years has earned only about 8.6 percent a year.
The discrepancy between stock market return and investor return is examined by Ilia D. Dichev, a University of Michigan accounting professor, in a paper published in the March 2007 edition of The American Economic Review, “What Are Stock Investors’ Actual Historical Returns? Evidence From Dollar-Weighted Returns.”
To understand the difference between a stock’s return and an investor’s return, consider someone who buys 100 shares of a company at a price of $10 a share. A year later, the share price is up to $20, and the investor buys 100 more shares.
Alas, the investor’s luck has run out. By the end of the next year, the price has fallen back to $10 and the investor sells his 200 shares.
A buy-and-hold investor who bought at $10, held the stock for two years, and then sold at $10 would have had a zero return.