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The average investor has lagged cash over the past 20 years??
I find this chart hard to believe but the average investor over the past 20 years has made an annualized 2% to 3% per annum??? Is this just buy and hold propaganda or can it be true??
Is that "average investor" dollar weighted? Most likely not. So ... sure it's very possible. Chasing hot trends and selling after they tank will get you to zero sum fast.
Agree with Dex that these "average investor" stories are hard to quantify. Also - A lot of 401k type plans allow the investor to borrow significant sums from the plan during their working years and than "repay" that over time - probably paying a very low rate of interest on the money.
Isn't the overall investing universe mostly closed? Assuming it includes 'all' asset classes (including real estate, cash, gold, etc.), the money has to be in something. One outgoing money is fees. Even if we assume investors spent 1-2%/year on fees, on an average they should have still made money, right? Someone has to make money to balance out someone losing money.
This MarketWatch referenced article should really not shock anyone.
It is simply another report on the very consistent Dalbar studies, but with an extended comparative array of investment categories. Typically, the Dalbar individual investor returns analyses are only contrasted against the S&P 500 long-term returns as the standard of performance measurement.
These comparative performance measures have been so consistently against the private investor that I elect not to Link them on the MFO Board. It is “old stuff”, and not particularly remarkable.
The most noteworthy data in the chart presentation are the 20-year average returns for the vast array of categories that were included in the chart itself. Will these disparate results remain intact in the future or will there be a regression-to-the-mean? Therein rests the investor’s challenge.
If you are dismayed by the 20-year data presentation, you will be even more offended by the poor 30-year performance record attributed to individual investors. It too emphasizes the humiliating and destructive performance of Joe Six-Pack. Here is a Link to a recent Jason Zweig NY Times article that focused on this same topic for a 30-year period:
The article does a workmanlike job of explaining its title: “Just How Dumb Are Investors?” Zweig finds an easy answer to that vexing question which was discussed on the MFO Board a few weeks ago.
Zweig observes that “Investors aren't nearly as dumb as Dalbar's numbers suggest. But everyone can still get smarter.” Hope springs eternal.
The Dalbar methodology is surely not perfect. Even Dalbar has acknowledged that observation. However, it is sufficiently structured to capture the overarching investor lackluster performance. Absolute numbers are method dependent.
It appears that individual investors suffer from a triple investment whammy. Morningstar constantly reports that actively managed funds usually underperform their representative benchmarks. Because of poor timing or other financial commitments, fund investors typically collect returns that are below those generated by the funds they buy. Embedded within that finding is that investors tend to favor the “hot-hand” behavioral style of performance chasing. All these misbehavior factors, and many others, erode investor annual returns.
The numbers change depending on the timeframe and the study methodology, but the dismal investor rewards pattern has remained intact for decades. Not that its especially good news, but institutional agents also underperform their respective benchmarks, although by a slightly lesser magnitude than the citizen investor.
These data comparisons are one of the persistent arguments for a buy-and-hold strategy for extended, but not forever, timeframes.
MJG, going back in time a bit. Over the 10 years ending March 31, 1999 only 2 newsletter timing strategies out of 59 tracked by Mark Hulbert were able to beat the returns of a buy and hold strategy in the Wilshire 5000 Index. Over the previous five years (ending March 31, 1999) just 1 out of 104 timing strategies beat the Wilshire 5000 Index. (source: The Hulbert Financial Digest April 27, 1999 issue p.12)
As for Dalbar, they mapped investor return data from January 1984 to December 1997. Over that period the S&P had an annualized return of 17.1%. But the Dalbar study found that the average equity fund investor had an annualized return of only 6.7%. (source: "1999 Personal Planning Investment Guide" Special Advertising Section, Forbes Magazine, May 3, 1999, p. 12.)
I will tell you why average investor has lagged. It is because average investor does not invest lumpsum and hold on for dear life for 20 years. This is what happens to average investor.
Average investor is told to DCA. So he starts DCAing at Y-20. He had $100,000 but he does not invest $100,000 at Y-20. He invests $5K, then another $5K at Y-19. Market is going up. He DCA'ing is effing him up. At Y-15 he realizes is $25 investment is only worth $40K. Everyone is celebrating 5-year returns. M* is rolling out red carpet for fund companies.
Average Jo now takes remaining $75K and invests it Y-15. Y-14 his $115K investment is now worth $120K. He is still up, and he is complacent because so is everyone else. Market starts tanking. Y - 12 his investment is worth $120K. 5 Years numbers are still positive from funds. He thinks, oh yeah market will come back. Y - 11 He is at $55K. 5 year numbers suck!. Things are not okay any more. He sells.
$100K is now worth $55K. Y - 10. Market returned 50% in the past 2 years. Time to get back in again. Rinse. Repeat.
Moral Of the Story: Stop watching CNBC, Stop reading M*. Come to MFO. Learn.
This exchange really revolves around Dalbar’s consistent findings that the “Average Investor” almost universally underperforms the mutual funds that he buys by a huge number. Often this mythical “Average Investor” captures only between 20% and 40% of his mutual fund’s quoted returns. That’s devastating from a retirement perspective.
Our buddy, Vintage Freak, paints a dismally dark and uncompromisingly bleak portrait of the “Average Investor’s” investment acumen. Initially, his representative caricature has a moderately conservative investment approach. Unfortunately, he abandons his good intentions and does not stay the course. He fails the persistence and the patience tests.
His intemperate market actions quickly unmask him both as an inept and an unlucky market timer. The marketplace is a challenging task master, and our “Average Investor” pays the price for his imprudent and whimsical activity, a least according to Vintage Freak’s profile. It’s a sad tale of a dysfunctional investor, but plausible.
Rather than assembling some ad hoc stories, I thought it would be a worthwhile exercise to explore the wisdom or foolishness of our “Average Investor’s” game plan using Monte Carlo-based analyses. Thousands of reasonable cases can be generated and examined in just a few minutes.
Towards that end, I ran 4 cases on the Portfolio Visualizer’s website. If you wish to put their Monte Carlo simulator to use on your portfolio possibilities, here is a Link to it:
The 4 cases that I input were designed to examine the benefits (or not) of a Dollar Cost Averaging (DCA) strategy compared to a full immediate commitment of monies, and the benefits (or not) of a broadly diversified portfolio contrasted against a single Large Cap Blend position.
I completed this brief study using the parameters that Vintage Freak invented. The time period was 20 years. I used the site’s statistical market category historical returns option without inflation for simplicity. The Monte Carlo code runs 10,000 random cases for each scenario.
For comparative purposes I postulated a diversified portfolio with 30% Large Cap Blend, 10% Small Cap Value, 10% REIT, 10% International Stock, 20% Short Term Corporate Bond, and 20% Total Bond holdings. According to the Portfolio Visualizer’s output, this diversified portfolio only compromised expected returns by a small amount (10.43% vs. 11.79%), but substantially attenuated the portfolio’s volatility (10.66% vs. 17.96%). Diversification is close to a free lunch.
The simulations demonstrated the wisdom of Dollar Cost Averaging over an immediate full commitment of money by a small margin. It is a small victory, but it is above a noise level.
The benefits from portfolio diversification were magnificent. The median returns for the diversified portfolio outdistanced those from the concentrated Large Cap Blend pace-horse by more than a factor of two for both the DCA and the Immediate full investment scenarios.
These analyses took only a few minutes to complete on the Monte Carlo simulator. And it was fun to do. I encourage all you guys to play what-if games with this excellent and practical investment tool. Monte Carlo was specifically designed during World War II to explore uncertain, complex events. It’s fully within Monte Carlo’s competency wheelhouse for the non-predictability of the marketplace. Learn and prosper.
I hope this little drill is helpful for a puzzled and perplexed someone out there in MFO space.
The inhabitants of this board who have been around the investment game for the past 20 years must be *above* average investors. That's because I can't imagine any of them earning a mere 2% to 3% per annum over that time frame. In fact, I can't imagine any investor sticking it out over 20 years with those type of returns. It would appear the *average* investor referred to in these types of studies are a composite of hypothetical creatures.
Edit: As an aside, the nice thing about accumulating wealth in the investment/trading game is it doesn't require a high intelligence or any knowledge whatsoever of math and statistics.
Can we please do a permanent and sitewide delinking of D C A so as not to mislead newbies toward the particular Virtus CEF?? Or have on every page, or at the front, a reminder/mandate to do it with spaces, or dca ... anything other than this misleading result of autolinking? Possible? Please?
I dollar cost averaged my whole investment lifespan. It began with $25 a month through Twentieth Century and at least once a year I would revisit that number and increase or stay put. As time went on I was putting in several hundred dollars a month. This meant of course that I was frugal in my social life. I didn't forgo a social life per se, but I didn't throw money away either. It was this discipline that got me to where I am now.
If I had been making only 2% all those years I would have been discouraged for sure. I had my losing investments as well as my home runs. I certainly made more than 2% so this article like so much of the Marketwatch stuff is just drivel to me.
What I find fascinating now is investing this money on my own after years of 403b. I rolled it over to my own account and am testing what I have learned over years. I think I have done well so far but knock on wood. At least I know who to blame if things don't go right.
I suspect you are either being too generous or too naïve in our assessment of individual investor performance.. Given your past postings I gage the odds of you being too naïve as nearly zero, so I guess you are being overly liberal in your appraisal.
Overall, investors are not that talented, and often do not take the time to measure their successes against a proper benchmark. Even professionals share this very common failure.
Your post reminded me of several stories that appear in Peter Bernstein’s classic “Capital Ideas” book. As recently as the 1960s, Bill Sharpe reported to Bernstein that professional advisors and institutional agents did not keep proper score. They assumed they were dong well, but did not document their records. In general, those records were uniformly miserable. Alfred Crowles 3rd documented how badly these pros did in their inept forecasting as early as the mid-1930s.
The performance statistics are at least reasonably accurate although they are not perfect. They need not be perfect since the percentages are in continuous change. There are periods when both the amateur ranks and the professionals do extremely well. But a conservation of profits law dictates that the average investor (both institutional and amateurs) must on average earn less than the overall market because of fee and cost leakage that subtracts from the total market rewards.
Also note that the investor population itself is in constant flux. Poor performers drop out. Today’s investors are not the same group that was underperforming 20 years ago. The survival rate of mutual funds is a staggeringly low percentage. Losers do disappear from the investment scene.
Like you, I do believe that long-term MFO participants are likely near the top in terms of returns. But many exceptions exist, and the membership of MFO is dynamic. That’s one reason why I try to introduce members (especially new ones) to the organizing magic of statistical analyses.
On a personal note, I have been investing for almost 60 years. I did not do well in my earlier years and was victimized by the industry touts. I did finally learn. It does take learning, patience, and persistence. And some painful losing, and a ton of reading.
>>>>It does take learning, patience, and persistence. And some painful losing, and a ton of reading.<<<<<
Of all that you have posted, much I have agreed with, while some vehemently disagreed with ( i.e. your fixation with intelligence, math, and statistics) the above we could not agree more. I may have posted this before, but at one time I had a library of around 500 books on the stock market (now culled to around 250) In fact, one of those, Rogues To Riches by Murray Teigh Bloom begins its first chapter with an interview of your aforementioned Alfred Cowles. And a really fascinating interview at that. In fact, it was one of the many books I read that reinforced my belief in the power of momentum investing. Mr Cowles said in that interview that the only positive finding he uncovered while conducting his research on the futility of the forecasters was how you could make a lot of money in following what he called the "inertia" principle. On a side note, I spoke with Mr. Bloom a couple years after his book's publication and found him very welcoming and gracious.
Alfred Cowles also mentioned in his interview with Mr Bloom that " the element of luck is terribly important in the market." Amen to that!! I am the poster boy for luck in the markets - and PERSISTENCE since I spent my first 19 market years just spinning my wheels. Of course I have mentioned before that one of my top five books of all time is Max Gunther's The Luck Factor and primarily Part IV of that book on the five luck adjustment theories.
I always have a well defined purpose when I submit to any forum, and especially when that forum is MFO. In part, that’s because of the high respect I have for MFO members and their considered financial questions and advice. Full agreement is never expected. Markets would be ineffective without diverse timeframes, goals, and perspectives.
I am not surprised by the extent of your financial library. It is clearly demonstrated in your many informed posts.
My own postings likely overemphasize my actual dedication to math skills and statistical analyses. Since my posts are very goal oriented, I wanted to establish some area of expertise that was not firmly claimed by other MFO contributors. Monte Carlo analyses and the need for statistical application seemed to fit that goal in spades.
Over extensive readings of both FundAlarm and MFO submittals, I concluded that at least a few investors are truly mathematically dysfunctional. Others were not familiar with the power of statistical methods to better inform investment decision making. My judgment also included the professional field. Americans have notoriously bad math skills.
This deficiency is ultimately harmful to anyone’s portfolio. I hoped to address this defect just a little with some directed references and with a few carefully crafted commentary. Some would conclude that I miserably failed. That’s okay; I have broad shoulders.
I fully recognize that required math skills are tightly correlated with the job demands. Different sets of math skills are useful for disparate careers and tasks. Investing and financial matters are inundated with statistical data sets. All investors could improve their odds of success if they enhanced their math and statistical tool kit.
In the end, my desire to improve that tool kit for all MFO members motivated my postings. I am fully aware of the limitations of math in this regard. All numbers do not have equal validity; all analyses are not firmly grounded in a real world model. Under certain circumstances, number crunching can generate poor conclusions and/or give an investor a false sense of confidence and security.
These pitfalls can be partially moderated or entirely avoided with adroit numbers handling. Like any tools, math and stats have definite limitations, and are only effective when properly applied to tasks. Again, experience is the best guide to identifying any shortcomings in the tool set or its application.
Well, that’s why my MFO submittals tend to focus on math matters. I am near the bottom of the totem pole when it comes to identifying superior mutual funds, so I leave that task to the many experts on our MFO panel. I simply do not commit sufficient time to that arduous duty assignment.
I hope this clarifies my submittal stress towards math and Monte Carlo analyses.
Our buddy, Vintage Freak, paints a dismally dark and uncompromisingly bleak portrait of the “Average Investor’s” investment acumen. Initially, his representative caricature has a moderately conservative investment approach. Unfortunately, he abandons his good intentions and does not stay the course. He fails the persistence and the patience tests.
Actually, quite to the contrary. I am castigating all the a-holes who screw up the life of the average investor. I am trying to explain that in the imaginary world of "if you had invested 100k in year X and held on for Y years you would have earned much more" people forget that a person has needs that make that impossible and he only contributes to his portfolio over a period of time.
I am very skeptical of fund returns vs investor returns published by various sources. I don't think they are capturing the problem properly. When you buy vs what you buy is always important for average investor to outperform. That determines over various periods of time whether at any given point of time ones portfolio is positive. As long as it is, that investor holds and continues to invest and not otherwise. Even if that position is cash or short term bond funds.
So quite to the contrary dear MJG I am not criticizing the investor at all. I am simply tired of reading articles mouthing the same thing again and again. Authors need to fulfill their writing quotas wi other topics. Maybe there will be Another mad off like scandal or something soon. I know Marilyn Monroe cannot die all over again to drive conspiracy theory articles. Seems to me after an extended bull market run, the average investor is now fair game.
Finally, we cannot nitpick time periods. from 1995 to 2000, DCA was a suckers game. Whether one wants to admit or not, what I stated tongue in cheek is exactly what happened. Let's not kid ourself everyone was diversified. Even those that thought they were were screwed by their fund managers all owning growth / tech stocks on the equity side and high yield bonds on the income side. Hindsight is always 20/20. However sincenyounhave the ability, is it possible for you to run your calculations for 20 years in prior period? Or even rolling 20 year periods? I think you will agree that would be a more sound way to conclude whether average investor sucks or not.
Comments
What is the definition of an average investor?
It is over 20 years - was there a draw down of the investors' money, add money or what?
FYI - HYD reduced it's Puerto Rico exposure to 4.3% - pretty low compared to some others.
Agree with Dex that these "average investor" stories are hard to quantify. Also - A lot of 401k type plans allow the investor to borrow significant sums from the plan during their working years and than "repay" that over time - probably paying a very low rate of interest on the money.
This MarketWatch referenced article should really not shock anyone.
It is simply another report on the very consistent Dalbar studies, but with an extended comparative array of investment categories. Typically, the Dalbar individual investor returns analyses are only contrasted against the S&P 500 long-term returns as the standard of performance measurement.
These comparative performance measures have been so consistently against the private investor that I elect not to Link them on the MFO Board. It is “old stuff”, and not particularly remarkable.
The most noteworthy data in the chart presentation are the 20-year average returns for the vast array of categories that were included in the chart itself. Will these disparate results remain intact in the future or will there be a regression-to-the-mean? Therein rests the investor’s challenge.
If you are dismayed by the 20-year data presentation, you will be even more offended by the poor 30-year performance record attributed to individual investors. It too emphasizes the humiliating and destructive performance of Joe Six-Pack. Here is a Link to a recent Jason Zweig NY Times article that focused on this same topic for a 30-year period:
http://online.wsj.com/news/articles/SB10001424052702304655304579551914113672646
The article does a workmanlike job of explaining its title: “Just How Dumb Are Investors?” Zweig finds an easy answer to that vexing question which was discussed on the MFO Board a few weeks ago.
Zweig observes that “Investors aren't nearly as dumb as Dalbar's numbers suggest. But everyone can still get smarter.” Hope springs eternal.
The Dalbar methodology is surely not perfect. Even Dalbar has acknowledged that observation. However, it is sufficiently structured to capture the overarching investor lackluster performance. Absolute numbers are method dependent.
It appears that individual investors suffer from a triple investment whammy. Morningstar constantly reports that actively managed funds usually underperform their representative benchmarks. Because of poor timing or other financial commitments, fund investors typically collect returns that are below those generated by the funds they buy. Embedded within that finding is that investors tend to favor the “hot-hand” behavioral style of performance chasing. All these misbehavior factors, and many others, erode investor annual returns.
The numbers change depending on the timeframe and the study methodology, but the dismal investor rewards pattern has remained intact for decades. Not that its especially good news, but institutional agents also underperform their respective benchmarks, although by a slightly lesser magnitude than the citizen investor.
These data comparisons are one of the persistent arguments for a buy-and-hold strategy for extended, but not forever, timeframes.
Best Wishes.
As for Dalbar, they mapped investor return data from January 1984 to December 1997. Over that period the S&P had an annualized return of 17.1%. But the Dalbar study found that the average equity fund investor had an annualized return of only 6.7%. (source: "1999 Personal Planning Investment Guide" Special Advertising Section, Forbes Magazine, May 3, 1999, p. 12.)
Average investor is told to DCA. So he starts DCAing at Y-20. He had $100,000 but he does not invest $100,000 at Y-20. He invests $5K, then another $5K at Y-19. Market is going up. He DCA'ing is effing him up. At Y-15 he realizes is $25 investment is only worth $40K. Everyone is celebrating 5-year returns. M* is rolling out red carpet for fund companies.
Average Jo now takes remaining $75K and invests it Y-15. Y-14 his $115K investment is now worth $120K. He is still up, and he is complacent because so is everyone else. Market starts tanking. Y - 12 his investment is worth $120K. 5 Years numbers are still positive from funds. He thinks, oh yeah market will come back. Y - 11 He is at $55K. 5 year numbers suck!. Things are not okay any more. He sells.
$100K is now worth $55K. Y - 10. Market returned 50% in the past 2 years. Time to get back in again. Rinse. Repeat.
Moral Of the Story: Stop watching CNBC, Stop reading M*. Come to MFO. Learn.
This exchange really revolves around Dalbar’s consistent findings that the “Average Investor” almost universally underperforms the mutual funds that he buys by a huge number. Often this mythical “Average Investor” captures only between 20% and 40% of his mutual fund’s quoted returns. That’s devastating from a retirement perspective.
Our buddy, Vintage Freak, paints a dismally dark and uncompromisingly bleak portrait of the “Average Investor’s” investment acumen. Initially, his representative caricature has a moderately conservative investment approach. Unfortunately, he abandons his good intentions and does not stay the course. He fails the persistence and the patience tests.
His intemperate market actions quickly unmask him both as an inept and an unlucky market timer. The marketplace is a challenging task master, and our “Average Investor” pays the price for his imprudent and whimsical activity, a least according to Vintage Freak’s profile. It’s a sad tale of a dysfunctional investor, but plausible.
Rather than assembling some ad hoc stories, I thought it would be a worthwhile exercise to explore the wisdom or foolishness of our “Average Investor’s” game plan using Monte Carlo-based analyses. Thousands of reasonable cases can be generated and examined in just a few minutes.
Towards that end, I ran 4 cases on the Portfolio Visualizer’s website. If you wish to put their Monte Carlo simulator to use on your portfolio possibilities, here is a Link to it:
http://www.portfoliovisualizer.com/monte-carlo-simulation
The 4 cases that I input were designed to examine the benefits (or not) of a Dollar Cost Averaging (DCA) strategy compared to a full immediate commitment of monies, and the benefits (or not) of a broadly diversified portfolio contrasted against a single Large Cap Blend position.
I completed this brief study using the parameters that Vintage Freak invented. The time period was 20 years. I used the site’s statistical market category historical returns option without inflation for simplicity. The Monte Carlo code runs 10,000 random cases for each scenario.
For comparative purposes I postulated a diversified portfolio with 30% Large Cap Blend, 10% Small Cap Value, 10% REIT, 10% International Stock, 20% Short Term Corporate Bond, and 20% Total Bond holdings. According to the Portfolio Visualizer’s output, this diversified portfolio only compromised expected returns by a small amount (10.43% vs. 11.79%), but substantially attenuated the portfolio’s volatility (10.66% vs. 17.96%). Diversification is close to a free lunch.
The simulations demonstrated the wisdom of Dollar Cost Averaging over an immediate full commitment of money by a small margin. It is a small victory, but it is above a noise level.
The benefits from portfolio diversification were magnificent. The median returns for the diversified portfolio outdistanced those from the concentrated Large Cap Blend pace-horse by more than a factor of two for both the DCA and the Immediate full investment scenarios.
These analyses took only a few minutes to complete on the Monte Carlo simulator. And it was fun to do. I encourage all you guys to play what-if games with this excellent and practical investment tool. Monte Carlo was specifically designed during World War II to explore uncertain, complex events. It’s fully within Monte Carlo’s competency wheelhouse for the non-predictability of the marketplace. Learn and prosper.
I hope this little drill is helpful for a puzzled and perplexed someone out there in MFO space.
Best Wishes.
earning a mere 2% to 3% per annum over that time frame. In fact, I can't imagine any investor sticking it out over 20 years with those type of returns. It would appear the *average* investor referred to in these types of studies are a composite of hypothetical creatures.
Edit: As an aside, the nice thing about accumulating wealth in the investment/trading game is it doesn't require a high intelligence or any knowledge whatsoever of math and statistics.
If I had been making only 2% all those years I would have been discouraged for sure. I had my losing investments as well as my home runs. I certainly made more than 2% so this article like so much of the Marketwatch stuff is just drivel to me.
What I find fascinating now is investing this money on my own after years of 403b. I rolled it over to my own account and am testing what I have learned over years. I think I have done well so far but knock on wood. At least I know who to blame if things don't go right.
I suspect you are either being too generous or too naïve in our assessment of individual investor performance.. Given your past postings I gage the odds of you being too naïve as nearly zero, so I guess you are being overly liberal in your appraisal.
Overall, investors are not that talented, and often do not take the time to measure their successes against a proper benchmark. Even professionals share this very common failure.
Your post reminded me of several stories that appear in Peter Bernstein’s classic “Capital Ideas” book. As recently as the 1960s, Bill Sharpe reported to Bernstein that professional advisors and institutional agents did not keep proper score. They assumed they were dong well, but did not document their records. In general, those records were uniformly miserable. Alfred Crowles 3rd documented how badly these pros did in their inept forecasting as early as the mid-1930s.
The performance statistics are at least reasonably accurate although they are not perfect. They need not be perfect since the percentages are in continuous change. There are periods when both the amateur ranks and the professionals do extremely well. But a conservation of profits law dictates that the average investor (both institutional and amateurs) must on average earn less than the overall market because of fee and cost leakage that subtracts from the total market rewards.
Also note that the investor population itself is in constant flux. Poor performers drop out. Today’s investors are not the same group that was underperforming 20 years ago. The survival rate of mutual funds is a staggeringly low percentage. Losers do disappear from the investment scene.
Like you, I do believe that long-term MFO participants are likely near the top in terms of returns. But many exceptions exist, and the membership of MFO is dynamic. That’s one reason why I try to introduce members (especially new ones) to the organizing magic of statistical analyses.
On a personal note, I have been investing for almost 60 years. I did not do well in my earlier years and was victimized by the industry touts. I did finally learn. It does take learning, patience, and persistence. And some painful losing, and a ton of reading.
Thank you for your comments.
Best Wishes.
Of all that you have posted, much I have agreed with, while some vehemently disagreed with ( i.e. your fixation with intelligence, math, and statistics) the above we could not agree more. I may have posted this before, but at one time I had a library of around 500 books on the stock market (now culled to around 250) In fact, one of those, Rogues To Riches by Murray Teigh Bloom begins its first chapter with an interview of your aforementioned Alfred Cowles. And a really fascinating interview at that. In fact, it was one of the many books I read that reinforced my belief in the power of momentum investing. Mr Cowles said in that interview that the only positive finding he uncovered while conducting his research on the futility of the forecasters was how you could make a lot of money in following what he called the "inertia" principle. On a side note, I spoke with Mr. Bloom a couple years after his book's publication and found him very welcoming and gracious.
Alfred Cowles also mentioned in his interview with Mr Bloom that " the element of luck is terribly important in the market." Amen to that!! I am the poster boy for luck in the markets - and PERSISTENCE since I spent my first 19 market years just spinning my wheels. Of course I have mentioned before that one of my top five books of all time is Max Gunther's The Luck Factor and primarily Part IV of that book on the five luck adjustment theories.
I always enjoy reading your perspectives on the markets and investing.
Please keep them coming.
Old_Skeet
Thanks for taking time to so courteously reply.
I always have a well defined purpose when I submit to any forum, and especially when that forum is MFO. In part, that’s because of the high respect I have for MFO members and their considered financial questions and advice. Full agreement is never expected. Markets would be ineffective without diverse timeframes, goals, and perspectives.
I am not surprised by the extent of your financial library. It is clearly demonstrated in your many informed posts.
My own postings likely overemphasize my actual dedication to math skills and statistical analyses. Since my posts are very goal oriented, I wanted to establish some area of expertise that was not firmly claimed by other MFO contributors. Monte Carlo analyses and the need for statistical application seemed to fit that goal in spades.
Over extensive readings of both FundAlarm and MFO submittals, I concluded that at least a few investors are truly mathematically dysfunctional. Others were not familiar with the power of statistical methods to better inform investment decision making. My judgment also included the professional field. Americans have notoriously bad math skills.
This deficiency is ultimately harmful to anyone’s portfolio. I hoped to address this defect just a little with some directed references and with a few carefully crafted commentary. Some would conclude that I miserably failed. That’s okay; I have broad shoulders.
I fully recognize that required math skills are tightly correlated with the job demands. Different sets of math skills are useful for disparate careers and tasks. Investing and financial matters are inundated with statistical data sets. All investors could improve their odds of success if they enhanced their math and statistical tool kit.
In the end, my desire to improve that tool kit for all MFO members motivated my postings. I am fully aware of the limitations of math in this regard. All numbers do not have equal validity; all analyses are not firmly grounded in a real world model. Under certain circumstances, number crunching can generate poor conclusions and/or give an investor a false sense of confidence and security.
These pitfalls can be partially moderated or entirely avoided with adroit numbers handling. Like any tools, math and stats have definite limitations, and are only effective when properly applied to tasks. Again, experience is the best guide to identifying any shortcomings in the tool set or its application.
Well, that’s why my MFO submittals tend to focus on math matters. I am near the bottom of the totem pole when it comes to identifying superior mutual funds, so I leave that task to the many experts on our MFO panel. I simply do not commit sufficient time to that arduous duty assignment.
I hope this clarifies my submittal stress towards math and Monte Carlo analyses.
Best Wishes.
Actually, quite to the contrary. I am castigating all the a-holes who screw up the life of the average investor. I am trying to explain that in the imaginary world of "if you had invested 100k in year X and held on for Y years you would have earned much more" people forget that a person has needs that make that impossible and he only contributes to his portfolio over a period of time.
I am very skeptical of fund returns vs investor returns published by various sources. I don't think they are capturing the problem properly. When you buy vs what you buy is always important for average investor to outperform. That determines over various periods of time whether at any given point of time ones portfolio is positive. As long as it is, that investor holds and continues to invest and not otherwise. Even if that position is cash or short term bond funds.
So quite to the contrary dear MJG I am not criticizing the investor at all. I am simply tired of reading articles mouthing the same thing again and again. Authors need to fulfill their writing quotas wi other topics. Maybe there will be Another mad off like scandal or something soon. I know Marilyn Monroe cannot die all over again to drive conspiracy theory articles. Seems to me after an extended bull market run, the average investor is now fair game.
Finally, we cannot nitpick time periods. from 1995 to 2000, DCA was a suckers game. Whether one wants to admit or not, what I stated tongue in cheek is exactly what happened. Let's not kid ourself everyone was diversified. Even those that thought they were were screwed by their fund managers all owning growth / tech stocks on the equity side and high yield bonds on the income side. Hindsight is always 20/20. However sincenyounhave the ability, is it possible for you to run your calculations for 20 years in prior period? Or even rolling 20 year periods? I think you will agree that would be a more sound way to conclude whether average investor sucks or not.