Dec. 15, 2004
Stock investors' returns are lower than they think
ANN ARBOR, Mich.—Stock market investors are getting
poorer overall returns than they realize, says a University of Michigan business
This is because stock returns historically have been measured on a buy-and-hold
basis, which does not account for different returns that occur at different
points in time.
A new study by Ilia Dichev, associate professor of accounting at Michigan's
Stephen M. Ross School of Business, contends that traditional buy-and-hold
returns fail to assess the return experiences of stock investors because they
ignore the timing effects of capital flows in and out of securities.
Instead, Dichev suggests using a new, more accurate measure that involves
the dollar-weighting of returns (i.e., the returns generated by bigger investment
amounts receive greater weighting than the returns from smaller investment
amounts) and, therefore, properly reflects the effect of investors' timing.
"The compounding of buy-and-hold returns reflects the investing experience
of passive buy-and-hold investors and assumes an equal weighting of returns
over time," Dichev said. "However, most investors are actively trading
or otherwise engaging in stock-capital transactions.
"As a result, they are consciously or unconsciously timing particular
stocks or the market as a whole, and varying their net investment exposure
over time. Thus, while buy-and-hold returns provide a good benchmark to track
the investment performance of stocks, they can be a poor measure of the actual
return experience of investors, if capital-flow timing affects stock returns."
Dichev examined the long-run returns following all capital flows over the
entire history of available stock returns and across the United States and
many foreign countries. His findings indicate that aggregate dollar-weighted
returns are systematically and considerably lower than buy-and-hold returns.
The return differential is 1.3 percent for the NYSE/AMEX market between 1926
and 2002, 5.3 percent for the more volatile Nasdaq between 1973 and 2002, and
an average of 1.5 percent for 19 major stock markets around the world between
1973 and 2004.
"The results provide comprehensive evidence that stock investors' actual
returns are considerably lower than those from passive holdings and very different
from widely published and studied security returns," Dichev said.
Information on Dichev: http://www.bus.umich.edu/FacultyBios/FacultyBio.asp?id=000290980.
The study: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=544142
Contact: Bernie DeGroat
Phone: (734) 936-1015 or 647-1847