EDN wrote:You are still thinking that all money in the stock market stays there permanently and therefore only frictions reduce returns. No, the actual investor return is the time-weighted result they earn across their average stocks/bonds/cash holdings. In 2007, you could have several investors selling some cash/bonds to buy stocks at high prices/high yields, with another investor selling some stocks to buy cash/bonds.
Eric, how can investor A sell a share of stock without investor B buying a share of stock? Investor A can spend the proceeds however she wants, but the share of stock remains in the market and its return counts as part of the return of the market. (There's some M&A activity, bankruptcy, new share issuance, etc., but the net effect is not large).
Remember, the original claim was "all investors in United States stock mutual funds was 4.25 percent, annualized. Over the same period, the benchmark Standard & Poor’s 500-stock index returned an annualized 8.21 percent. That’s a huge gap — nearly four percentage points a year over two decades."
If investor A loses by selling low, investor B gains by buying low. When investor C loses by buying high, investor D gains by selling high. Timing is a zero sum game.
See earlier posts and the wealth of documentation out there on problems with Dalbar's methodology.