Dead Investors Outperform Active Traders: Here’s Why

While delivering returns, inactive investors—often referred to as “dead” investors—appear to outperform their active counterparts.

These so-called “dead” investors typically employ a buy-and-hold strategy, abstaining from the impulsive trading that can lead to higher costs and taxes. Investment experts argue that inaction can often yield superior results compared to a more hands-on trading approach.

According to financial psychologist and certified financial planner Brad Klontz, the primary threat to investor returns lies not in external factors like government policy or corporate performance, but rather in human behavior.

“Investors often sell in a panic and buy during euphoric moments,” said Klontz, who is also managing principal of YMW Advisors based in Boulder, Colorado, and an advisor on Finance Newso’s Advisor Council. “We are our own worst enemy, which is why dead investors frequently outperform the living.”

Inactive investors tend to maintain their stock holdings through market fluctuations.

Historically, stock markets have consistently rebounded following downturns, reaching new peaks each time, Klontz pointed out. Data illustrates the negative impact of poor investment habits in comparison to the buy-and-hold approach.

A report from DALBAR shows that in 2023, the average return for stock investors fell short of the S&P 500 index by 5.5 percentage points. While the average investor saw returns of approximately 21%, the index itself yielded 26%.

This trend persists over more extended time periods as well.

According to Morningstar, investors in U.S. mutual funds and exchange-traded funds generated an average annual return of 6.3% from 2014 to 2023, contrasting with the average fund’s total return of 7.3% during the same span, revealing a “significant” gap, as noted by Jeffrey Ptak, managing director for Morningstar Research Services.

This discrepancy implies investors left approximately 15% of their potential returns unearned over that decade, a pattern that remains consistent with returns from prior periods, Ptak explained.

“If you buy high and sell low, your return will lag the buy-and-hold return. That’s why your return fell short,” Ptak stated.

Behavioral impulses to sell during market declines or invest in trending assets—like meme stocks, cryptocurrencies, or gold—are rooted in human evolution, experts suggest.

“We are fundamentally wired to conform to the herd,” Klontz noted, acknowledging that our investment strategies often conflict with what is actually effective.

Market fluctuations can trigger primal fight-or-flight responses, said Barry Ritholtz, chairman and chief investment officer of Ritholtz Wealth Management.

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“Humans evolved to survive on the savanna, and our instincts prompt us to react emotionally and immediately, which seldom ends well in financial markets,” Ritholtz explained.

Such behavioral missteps can accumulate into substantial losses, according to experts.

For example, a $10,000 investment in the S&P 500 from 2005 to 2024 would have valued nearly $72,000 for a buy-and-hold investor, reflecting a 10.4% annual return, according to J.P. Morgan Asset Management. Conversely, missing the ten best market days would reduce that value to $33,000, and skipping the twenty best days would yield a mere $20,000.

However, investors should not adopt a completely hands-off approach.

Financial advisors recommend taking fundamental steps, such as assessing one’s asset allocation to ensure it aligns with both investment goals and time horizons, as well as periodically rebalancing one’s portfolio to maintain an appropriate balance of stocks and bonds.

There are also funds available that can automate these processes for investors, including balanced funds and target-date funds.

These comprehensive funds offer extensive diversification while managing essential tasks such as rebalancing, as Ptak explained. This approach minimizes the need for frequent transactions, which is often crucial for investment success.

“Less is more,” Ptak said.

(However, experts advise caution: consider the tax implications of holding these funds in non-retirement accounts.)

Establishing routines can also enhance investment success, according to Ptak. This includes automating savings and investments wherever feasible, such as regular contributions to a 401(k) plan, enabling workers to invest without additional thought as contributions are deducted each pay period.