Most investors didn't come close to beating the S&P 500
Bad market timing and poor stock picking kept most investors from fully reaping the gains of the bull market last year.
"The average investor held too much in cash, was too concentrated in stocks that didn't perform well and avoided financial stocks that rallied last year," said Hart Lambur, co-founder and CEO of Openfolio, a social network with more than 70,000 members who share their investment portfolios.
The average investor on Openfolio had a gain of roughly 5 percent in 2016. That lagged the nearly 12 percent total return of the , which includes dividends, by more than 7 percentage points last year. (See chart below.)
Many Openfolio users liked stocks of tech titans, such as Amazon, Apple and Facebook, that generated double-digit gains last year. However, stocks of household names widely held by Openfolio investors, like FitBit, GoPro and Under Armour, hurt their portfolios more in 2016.
Part of the lag can be attributed to investors having a diversified portfolio. That is a good thing because it smooths volatility and can improve returns over long periods.
Yet when you consider that a balanced portfolio of 60 percent U.S. stocks and 40 percent U.S. bonds would have generated roughly 7 percent last year, Openfolio investors still fall short by 2 percentage points.
Mutual fund investors didn't fare that well last year either, based on preliminary data from investment research firm Morningstar. (See table below.)
Morningstar estimates the average investor returns by comparing fund returns to how much money flowed in and out of those funds.
"After a bear market, investors tend to buy bond funds. In a great stock market, they tend to buy more stock funds," said Russel Kinnel, Morningstar's head of manager research. "Investors chase fund performance and headlines."
It's not that investors always underperform their funds.
The second-longest bull market in history, which began in March 2009, has helped the average investor outperform in U.S. fund categories over three- and five-year periods. Target-date funds also tend to have better investor returns than average returns over the past 10 years, according to Morningstar.
You can easily avoid the mistakes that tripped up the average investor last year. "If you have a financial plan, you are a little more insulated from the fear and greed," Kinnel said.