Here's a statement of the obvious: The opinions expressed here are those of the participants, not those of the Mutual Fund Observer. We cannot vouch for the accuracy or appropriateness of any of it, though we do encourage civility and good humor.
This article should be dedicated to MJG. In the article " The average investor in stock mutual funds made 3.8% a year over the past 30 years..." I am skeptical on the methodology used to determine that tidbit.
And why some aging investor with a large nest egg should embrace a 20% and more decline in his portfolio is beyond me. My poor old Dad never recovered from the bear of 73/74 because of the timing of his retirement. Albeit, I would love a bear market about now.
It does depend on timing. All this buy and hold advice that constantly floods our media really does not apply to retirees or those close to retiring. The risk tolerance changes for some and with that so does their asset allocation.
It is a fine balance between capital preservation and having enough growth so your portfolio will last as long as you need.
It does depend on timing. All this buy and hold advice that constantly floods our media really does not apply to retirees or those close to retiring. The risk tolerance changes for some and with that so does their asset allocation.
It is a fine balance between capital preservation and having enough growth so your portfolio will last as long as you need.
Good point @ Junkster.
True that!
I really don't see how most of those under 50 or 55 will be able to retire with any sense of security. Only welfare will save them.
The vast majority of them don't have savings, pensions, large 401k savings and SS dates are pushed out further. Then they get fired/buy outs as they approach 60.
It does depend on timing. All this buy and hold advice that constantly floods our media really does not apply to retirees or those close to retiring. The risk tolerance changes for some and with that so does their asset allocation.
It is a fine balance between capital preservation and having enough growth so your portfolio will last as long as you need.
Good point @ Junkster.
True that!
I really don't see how most of those under 50 or 55 will be able to retire with any sense of security. Only welfare will save them.
The vast majority of them don't have savings, pensions, large 401k savings and SS dates are pushed out further. Then they get fired/buy outs as they approach 60.
The vast majority of folks do not appear to be that concerned with retirement. And as you've eluded, for some it's already too late. And unfortunately, Welfare nor Social Security can save them. Our American culture is in serious need of a reality check.
The chief thing I took from the piece is how short bear markets are, or at least not long. And of course you ought not to have moneys you will need nearterm in equities (he said).
This article should be dedicated to MJG. In the article " The average investor in stock mutual funds made 3.8% a year over the past 30 years..." I am skeptical on the methodology used to determine that tidbit.
And why some aging investor with a large nest egg should embrace a 20% and more decline in his portfolio is beyond me. My poor old Dad never recovered from the bear of 73/74 because of the timing of his retirement. Albeit, I would love a bear market about now.
Thanks Junkster. I'm more than skeptical of these "averages" that get thrown around. Twain said "Between Kipling and myself we corner all knowledge." He didn't mean to say both were equally brilliant. So WTF is the average investor? Does that have to be U.S. currency - or does it include the stash of "foreign" currency we keep on hand for our visits to Ontario? How about the wife's gold and jewelry collection? She considers it an investment. Does that count? The widow across the street puts her retirement money 100% in insured bank accounts. Is somebody like that included in that "average investor" statistic? Are FDIC insured deposits even counted?
If you include all the people "defaulted" into workplace retirement accounts - and a great many of them contribute very little and care even less about investing - I'd imagine you could skew those averages about as dramatically as the Twain quote does.
Illustration: "For example, imagine you survey 50 households in a neighborhood for their income. Most households make between $40,000 and $60,000 a year, but one household makes $5 million a year. When you compute the mean average, the number will be significantly higher than the “real” average income in that area, because the $5 million number is so much bigger than the others.
"In a similar way, if you had data showing that 9 people each had $1,000 in their bank accounts, but a tenth person only has $1, the median average would work out to $900.10 – almost 10% less than the most common amount."
I really think step #1 in any article like this should be (meaning "ought to be and not necessarily will be") to DEFINE THE TERMS.
I hold a sizeable amount of cash. If the bear makes presence and/or a good pull back should develop then I can buy good assets at more favorable prices. In addition, if one were to sell five percent of their equities for every five percent of their drop in price then they would be building cash and hopefully be able to buy back into the market at more favorable prices as stocks pullback. The big question is how to know when a market downturn will turn into bear market conditions.
Generally in a market decline of five percent I'll do nothing. As a ten percent decline approaches I'd sell about a sum equal to five percent of my equity holdings thus raising cash by a like amount and then as a fifteen percent decline in market prices approach sell another five percent and so on and so forth. This strategy works best in a non taxable account and with mutual fund holdings can be sold and then bought back through nav exchange/purchase plans.
@hank Reminds me of the stats that the energy company provides with the monthly bill.
***Your energy useage is blah-blah of what similar homes use in your neighborhood. Within 1 mile there are homes that range in size from 900 sq.ft. to 2,800 sq.ft. Many are older than others and have varying degrees of insulation, etc. Meaningless data...................
I too find the statistic that investors on “average” claim roughly only one-third of recorded returns very shocking. I don’t want to believe that this cohort (my cohort) is that inept. But multiple studies loosely reproduce that finding time and time again.
As John Maynard Keynes observed: “When the facts change, I change my mind. What do you do, sir?”
Yes, these studies are imperfect. Direct data is not immediately available so approximate workarounds are needed. If you examine these workaround methods, they seem to be reasonable and should generate pretty acceptable estimates with small error bars.
Very reputable firms, with incentives to get it right without prejudice, have done such studies. Vanguard, Morningstar, DALBAR, and Academia have reported not only their similar results, but also their procedures.
Historically, individual investors are fractionally rewarded market participants, are poor investment timers in terms of being late to the party, and fall victim to countless behavioral biases. Overall, we suck! Of course, MFOers are excluded from this assessment.
Statistics are great to organize, to summarize, and to simplify. But care must be exercised. As Albert Einstein cautioned: “Everything should be made as simple as possible, but not simpler”. In statistics, as well as elsewhere, precise definitions are important.
Climate and weather are two distinct temporal entities, one being long term and the other short term. In finance, wealth and returns are similarly two distinct entities.
Your post made some valid points, but your examples tended to conflate wealth with investment returns. My wife’s meager jewelry collection is a minor part of our wealth, but we never include it when assessing our annual investment returns. Regardless of any imagined gains, it is a marketplace that is not priced regularly or reliably. Most of your illustrations fall into that false categorization.
Your statistical online reference and excerpt provides yet another example of the dangers inherent in the Internet. The Internet is loaded with terrific information; it is also less loaded with faulty interpretations and outright errors. Your quote contained one such error.
You lifted the following quote correctly from your reference: "In a similar way, if you had data showing that 9 people each had $1,000 in their bank accounts, but a tenth person only has $1, the median average would work out to $900.10 – almost 10% less than the most common amount."
That quote has an embedded error. The quote said “median average”. The author meant “mean average”. The comment was in the mean average discussion section. For the given example, the median average remains at the $1000. level with the addition of the one dollar person.
On occasion, I have made similar, painful mistakes. Likely, we all inadvertently do the same. That’s just being human.
I only make this post for clarification and accuracy purposes. Please, please do not consider this a personal attack. It is definitely not. In the past, I have made enemies on MFO for just such a posting. I hope that is not the case here. I read and honor your submitted information and informed opinions. I will continue to do so. Please accept my respectful comments in the cordial spirit they were intended.
I believe I see some improvement, with journalists of all sorts more and more (maybe it's their eds ) using median instead of mean (=average). Median has its own problems, but not like the usual ones with average or mean, as in Shaq's and my average height is 6'5".
The need to report the mean or the median of any data set depends to a large degree on the asymmetry in the data distribution. The greater the asymmetry, the greater is the need to include both statistical measures.
Being a numbers nut, I like the most complete summary report that includes both measures as well as the data set's standard deviation. When reporting financial data that's not an unrealistic request. Good luck on that happening.
You know that I'm a big fan of using famous quotes. Here's one from Lord Kelvin that might be marginally applicable: "If you can't measure it, you can't improve it". Statistics aid in the understanding of those measurements.
"Making predictions is what Wall Street gurus do. If they are wrong, they have golden parachutes. "
If they're wrong no one even questions them. Jeremy Siegel's sunny outlook for 2008 at the end of 2007; Cramer's "Winners of the New World" in 2000 (and more recent things...); Gartman's ....well, a lot of things (like why did his Canadian actively managed CEF do lousy enough to be closed?)
As dopey as CNBC is, I'll give "Fast Money" credit for occasionally doing segments about botched calls by the featured traders. It's something.
MJG, point taken about asymmetry. As a sometime stats editor, I used to like to throw out high and low, in order to bell-curve things a little bit more, but today that's not so kosher. The Shaq quip was from Robert Reich, with a different average, as he is a great many inches shorter than I (who am of average height). I still prefer median when it's to be a single figure only.
Sorry the illustrations I put up from an online article did not meet your test for accuracy. The point I hoped to make was that statistics, generally speaking, can be misleading. However, I'm still puzzled about who these average investors are and how Dalbar reached their statistical conclusion.
To be clear, here's the quote I referenced from Ted's linked article: "The average investor in stock mutual funds made 3.8% a year over the past 30 years, according to Boston research firm Dalbar Inc".
MJG, with your expertise in statistical analysis perhaps you would clarify the following.
1. Was the study dollar weighted? In other words, if I had invested $100,000 in funds over that period and you had invested $10,000, was my degree of success (or lack thereof) weighted 10 times more than yours in the study results?
2. What percentage of "stocks" held constitutes a "stock mutual fund" by Dalbar's definition? I own a fund that by design holds about 40% equities and 60% fixed income. Would Dalbar consider that a "stock mutual fund"? If not, than what was their cut-off point for inclusion of a fund in this category?
3. Does the study group investors according to goal or purpose for investing? Were all those studied investing for retirement? Or were a significant number short term "speculators" throwing money at an already "hot" equity market? If the second group was included in the study, than it would tend to greatly exacerbate the degree to which investor returns lagged fund returns.
For the record MJG, I do believe a great many individual investors harm themselves by moving in and out of funds in an attempt to time markets - and that this tendancy contributes to a large percentage of them badly lagging their funds over time. I've mentioned this before in some of my own posts. What I try not to do is throw out terms like "average investor in stock funds" unless I can somehow quantify that term for my reader.
Thank you for reading my post. Sorry it is so negative with respect to your earlier submittal, but I believe some of your comments are prompted by your unfamiliarity with the annual DALBAR Quantitative Analysis of Investor Behavior (QAIB) report.
Keep in mind that DALBAR is just one investment agency that has examined the issue of individual investor shortfalls relative to the mutual funds that they own. Morningstar, Vanguard, and Academia have completed similar studies with roughly comparable conclusions. Investor shortfalls have been pervasive for decades, mostly associated with poor timing and wealth destruction crowd herding behaviors.
The DALBAR report is designed for consumption by financial advisors. They have been publishing it for 30 or so years. It has improved over these decades. Here is a Link to the 2014 edition:
I don’t read it each year since the findings seem to be fairly repeatable and predictable. The report does address your first two questions directly, and I’ll summarize them here. I’ll also address your third question from my general interpretation of their data collection and processing methods.
Your 1. The DALBAR methodology incorporates dollar weighting with its monthly measurements of fund inflows and outflows. From an engineering perspective, it’s comparable to a mass balancing assessment.
Your 2. Quoting from the referenced report: “QAIB 2014 examines real investor returns in equity, fixed income and asset allocation funds.” DALBAR makes the requisite adjustments to correctly judge investor performance relative to proper investment categories.
Your 3. DALBAR merely manipulates numbers. It makes zero distinctions with respect to an investor’s motivations or investment proclivities. Its data sets do not and can not contain that very personal information which is illusive and likely not stable for any investor. Most investors probably can’t reliably recall their specific trading reasons. That’s okay; it would be scary otherwise.
I’m answering your questions without much updated research. Please access the referenced DALBAR document. Reviewing a primary report is always better than a secondhand source.
I hope this satisfies your curiosity. I really don’t have a test for accuracy, but the distinction between climate and weather is substantial and should be understood and respected. Regardless if individual investors are sophisticated or clueless, they are at a disadvantage when competing against resource rich professionals. Most investors are not especially sophisticated.
Thanks for your added note/response MJG. After some additional time to reflect here ... I'd like to add two additional but closely related questions for your consideration.
(1) Let's say Bill who is 25 and not accustomed to saving opens an account with $50, planning on making the subsequent $50 monthly investments his fund house requires of these systematic investment plans. Three months later, having amassed $150 in investments, Bill withdraws the money and closes the account. Does Bill count as an "investor" under Dalbar's guidelines? Certainly, there are a great many like him who open accounts with the best of intentions but close them shortly after.
(2) How does Dalbar treat members of investment clubs in their methodology? As you know, these take their pooled monies and invest in funds and other securities. Does each member, who contributed perhaps $25 a month into the investment pool, count as an individual investor? If so, it would seem a daunting task to gather data about the length of time each member participated as well as the dollar amount contributed to various funds the club owned on his behalf - as membership in these clubs is often quite fluid.
Sorry to pester you with details - but owing to the very high esteem you appear to hold for Dalbar and the faith you profess in their methodology, I'd enjoy learning how the obstacles to arriving at precise definitive conclusions are met with .
I’m puzzled. Your detailed questions are quickly approaching fetish proportions. They suggest a hidden agenda or a commitment to a belief that is running aground against the rocks of real data. The studies that I have referenced are conceptually very simple money flow balances.
I am not especially attached to the DALBAR work. I only stressed its studies because their reports were highlighted in earlier postings by other MFO members. In my much earlier posts, I often referenced Vanguard, Morningstar, and Academic studies on this subject. All did respectable research on this topic.
I became aware of individual investor shortfalls when I read the research reported by academicians like Barber and Odean. Here are two Links to their informative studies:
I am surely not an expert on the details of the DALBAR methodology. In fact, I’m not an expert on anyone’s specific research. I would rate my understanding at the familiarity level. But I’ll attempt to answer your extended questions.
The DALBAR procedure is to assemble gross fund money inflows and outflows. DALBAR doesn’t know if those flows are from an individual investor or from a team of investors. They assemble these data and compute average results for a generic Bill, not a specific Bill or Team Bill. DALBAR doesn’t know if Bill is an investor or a speculator, but does report an average holding length.
For the Bill that you hypothesized, I (not DALBAR) would neither classify him as an investor or a speculator. I would label him a candidate Loser investor given his erratic behavior which just increases trading costs. Team Bill would likely be counted as a single investor. All this is just my interpretations. I suggest you contact DALBAR directly for a more definitive answer.
In closing, permit me to emphasize that I’m a rather neutral grader. I don’t hold too many folks in “high esteem”, yet I truly appreciate hard and honest effort, even if it is imperfect.
An insightful line in a John Stewart song, “Mother Country”, nicely captures my general assessment of most folks work ethic and loyalties: “Just a lot of people doing the best they could”. Please give the song a try; here’s a Link to that inspiring American song:
I do have “high esteem” for Stewart’s song writing skills. It’s terrific stuff. I hope you enjoy it as much as I do. The song has many embedded worthwhile lessons and it entertains.
As for the linked article at the top of the thread, you have a situation where the market is down 3-4% and we're getting articles like this. It's an example of a broken mentality where the market has gone up like it has and now people act like the market is broken when it goes down more than one day in a row. With articles like this with the market down 3-4% and people pulling tons of money out of funds, I just see this at this point being a pullback.
@scott, Exactly. The media is front running stories about a possible bear market when all we have so far is a small pullback. This same mentality is being played out with the "When will the Fed raise rates" story.
These stories get lots of attention and clicks from retail investors.
Example; The darling of the markets, SHAK is getting shaken down after their first quarterly report came out bad. Media pumped this IPO into a frenzy and now they are throwing darts at the balloon.
@scott, Exactly. The media is front running stories about a possible bear market when all we have so far is a small pullback. This same mentality is being played out with the "When will the Fed raise rates" story.
These stories get lots of attention and clicks from retail investors.
Example; The darling of the markets, SHAK is getting shaken down after their first quarterly report came out bad. Media pumped this IPO into a frenzy and now they are throwing darts at the balloon.
I absolutely make mistakes, but I will note that I think there's an issue with retail investors where they know what they like and they invest in that, but if you asked them regarding valuation, they probably would shrug. I said when SHAK ipo'd I'd be sorta interested (although it's just not my kind of thing) if it opened at around where it was supposed to price - mid-teens. It then proceeds to open in the mid-40's. So much of the future is already priced in so if the quarters coming are anything below great, the stock will continue to get wrecked.
As for the media, it's effectively "long and short", it's long hype and short when hype disappoints. It's all noise.
I actually did invest a small amount in the Lending Club IPO. I'm very glad I sold when I did because it proceeded to lose about 30% shortly after.
Look at BOX, down 17% after their first earnings call. The CEO is mad at analysts saying they have the share count wrong for their estimate.
@MFO Members: 23 Comments 274 Views, the Linkster's audience is growing by leaps and bounds, its now in the hundred's of thousands. I'm so good I can hardly stand myself, and much better looking than John Chisum, I mean John Wayne. Regards, Ted
"Most investors are not especially sophisticated" sophisticated adjective
1. Experienced in the ways of the world; lacking natural simplicity: . (of a person) having a great deal of experience and worldly wisdom, knowledge of how to dress elegantly etc
And the readership count keeps increasing. Many thanks to you.
But you have elected far too easy a hurdle when you choose John Wayne as the standard for good looks. Everyone satisfies that standard which, of course, is a necessary qualifier for successful investing.
Please continue your march, good luck, and Best Wishes.
Comments
And why some aging investor with a large nest egg should embrace a 20% and more decline in his portfolio is beyond me. My poor old Dad never recovered from the bear of 73/74 because of the timing of his retirement. Albeit, I would love a bear market about now.
It is a fine balance between capital preservation and having enough growth so your portfolio will last as long as you need.
Good point @ Junkster.
I really don't see how most of those under 50 or 55 will be able to retire with any sense of security. Only welfare will save them.
The vast majority of them don't have savings, pensions, large 401k savings and SS dates are pushed out further. Then they get fired/buy outs as they approach 60.
"I wonder what the people in Japan would say - is that bear over yet?"
Even if it is, Nikkei 38957 is a long ways off. Most investors will never see it again.
If you include all the people "defaulted" into workplace retirement accounts - and a great many of them contribute very little and care even less about investing - I'd imagine you could skew those averages about as dramatically as the Twain quote does.
Three Ways To Lie With Statistics
http://m.wikihow.com/Lie-with-Statistics
Illustration: "For example, imagine you survey 50 households in a neighborhood for their income. Most households make between $40,000 and $60,000 a year, but one household makes $5 million a year. When you compute the mean average, the number will be significantly higher than the “real” average income in that area, because the $5 million number is so much bigger than the others.
"In a similar way, if you had data showing that 9 people each had $1,000 in their bank accounts, but a tenth person only has $1, the median average would work out to $900.10 – almost 10% less than the most common amount."
I really think step #1 in any article like this should be (meaning "ought to be and not necessarily will be") to DEFINE THE TERMS.
Generally in a market decline of five percent I'll do nothing. As a ten percent decline approaches I'd sell about a sum equal to five percent of my equity holdings thus raising cash by a like amount and then as a fifteen percent decline in market prices approach sell another five percent and so on and so forth. This strategy works best in a non taxable account and with mutual fund holdings can be sold and then bought back through nav exchange/purchase plans.
Reminds me of the stats that the energy company provides with the monthly bill.
***Your energy useage is blah-blah of what similar homes use in your neighborhood.
Within 1 mile there are homes that range in size from 900 sq.ft. to 2,800 sq.ft. Many are older than others and have varying degrees of insulation, etc.
Meaningless data...................
I too find the statistic that investors on “average” claim roughly only one-third of recorded returns very shocking. I don’t want to believe that this cohort (my cohort) is that inept. But multiple studies loosely reproduce that finding time and time again.
As John Maynard Keynes observed: “When the facts change, I change my mind. What do you do, sir?”
Yes, these studies are imperfect. Direct data is not immediately available so approximate workarounds are needed. If you examine these workaround methods, they seem to be reasonable and should generate pretty acceptable estimates with small error bars.
Very reputable firms, with incentives to get it right without prejudice, have done such studies. Vanguard, Morningstar, DALBAR, and Academia have reported not only their similar results, but also their procedures.
Historically, individual investors are fractionally rewarded market participants, are poor investment timers in terms of being late to the party, and fall victim to countless behavioral biases. Overall, we suck! Of course, MFOers are excluded from this assessment.
Statistics are great to organize, to summarize, and to simplify. But care must be exercised. As Albert Einstein cautioned: “Everything should be made as simple as possible, but not simpler”. In statistics, as well as elsewhere, precise definitions are important.
Climate and weather are two distinct temporal entities, one being long term and the other short term. In finance, wealth and returns are similarly two distinct entities.
Your post made some valid points, but your examples tended to conflate wealth with investment returns. My wife’s meager jewelry collection is a minor part of our wealth, but we never include it when assessing our annual investment returns. Regardless of any imagined gains, it is a marketplace that is not priced regularly or reliably. Most of your illustrations fall into that false categorization.
Your statistical online reference and excerpt provides yet another example of the dangers inherent in the Internet. The Internet is loaded with terrific information; it is also less loaded with faulty interpretations and outright errors. Your quote contained one such error.
You lifted the following quote correctly from your reference: "In a similar way, if you had data showing that 9 people each had $1,000 in their bank accounts, but a tenth person only has $1, the median average would work out to $900.10 – almost 10% less than the most common amount."
That quote has an embedded error. The quote said “median average”. The author meant “mean average”. The comment was in the mean average discussion section. For the given example, the median average remains at the $1000. level with the addition of the one dollar person.
On occasion, I have made similar, painful mistakes. Likely, we all inadvertently do the same. That’s just being human.
I only make this post for clarification and accuracy purposes. Please, please do not consider this a personal attack. It is definitely not. In the past, I have made enemies on MFO for just such a posting. I hope that is not the case here. I read and honor your submitted information and informed opinions. I will continue to do so. Please accept my respectful comments in the cordial spirit they were intended.
Best Wishes.
The need to report the mean or the median of any data set depends to a large degree on the asymmetry in the data distribution. The greater the asymmetry, the greater is the need to include both statistical measures.
Being a numbers nut, I like the most complete summary report that includes both measures as well as the data set's standard deviation. When reporting financial data that's not an unrealistic request. Good luck on that happening.
You know that I'm a big fan of using famous quotes. Here's one from Lord Kelvin that might be marginally applicable: "If you can't measure it, you can't improve it". Statistics aid in the understanding of those measurements.
Best Wishes regardless of any height shortfalls.
If they're wrong no one even questions them. Jeremy Siegel's sunny outlook for 2008 at the end of 2007; Cramer's "Winners of the New World" in 2000 (and more recent things...); Gartman's ....well, a lot of things (like why did his Canadian actively managed CEF do lousy enough to be closed?)
As dopey as CNBC is, I'll give "Fast Money" credit for occasionally doing segments about botched calls by the featured traders. It's something.
Sorry the illustrations I put up from an online article did not meet your test for accuracy. The point I hoped to make was that statistics, generally speaking, can be misleading. However, I'm still puzzled about who these average investors are and how Dalbar reached their statistical conclusion.
To be clear, here's the quote I referenced from Ted's linked article: "The average investor in stock mutual funds made 3.8% a year over the past 30 years, according to Boston research firm Dalbar Inc".
MJG, with your expertise in statistical analysis perhaps you would clarify the following.
1. Was the study dollar weighted? In other words, if I had invested $100,000 in funds over that period and you had invested $10,000, was my degree of success (or lack thereof) weighted 10 times more than yours in the study results?
2. What percentage of "stocks" held constitutes a "stock mutual fund" by Dalbar's definition? I own a fund that by design holds about 40% equities and 60% fixed income. Would Dalbar consider that a "stock mutual fund"? If not, than what was their cut-off point for inclusion of a fund in this category?
3. Does the study group investors according to goal or purpose for investing? Were all those studied investing for retirement? Or were a significant number short term "speculators" throwing money at an already "hot" equity market? If the second group was included in the study, than it would tend to greatly exacerbate the degree to which investor returns lagged fund returns.
For the record MJG, I do believe a great many individual investors harm themselves by moving in and out of funds in an attempt to time markets - and that this tendancy contributes to a large percentage of them badly lagging their funds over time. I've mentioned this before in some of my own posts. What I try not to do is throw out terms like "average investor in stock funds" unless I can somehow quantify that term for my reader.
Regards
http://www.dalbar.com/News/DALBARintheNews/tabid/163/Default.aspx . Might take some digging.
Thank you for reading my post. Sorry it is so negative with respect to your earlier submittal, but I believe some of your comments are prompted by your unfamiliarity with the annual DALBAR Quantitative Analysis of Investor Behavior (QAIB) report.
Keep in mind that DALBAR is just one investment agency that has examined the issue of individual investor shortfalls relative to the mutual funds that they own. Morningstar, Vanguard, and Academia have completed similar studies with roughly comparable conclusions. Investor shortfalls have been pervasive for decades, mostly associated with poor timing and wealth destruction crowd herding behaviors.
The DALBAR report is designed for consumption by financial advisors. They have been publishing it for 30 or so years. It has improved over these decades. Here is a Link to the 2014 edition:
http://grandwealth.com/files/DALBAR QAIB 2014.pdf
I don’t read it each year since the findings seem to be fairly repeatable and predictable. The report does address your first two questions directly, and I’ll summarize them here. I’ll also address your third question from my general interpretation of their data collection and processing methods.
Your 1. The DALBAR methodology incorporates dollar weighting with its monthly measurements of fund inflows and outflows. From an engineering perspective, it’s comparable to a mass balancing assessment.
Your 2. Quoting from the referenced report: “QAIB 2014 examines real investor returns in equity, fixed income and asset allocation funds.” DALBAR makes the requisite adjustments to correctly judge investor performance relative to proper investment categories.
Your 3. DALBAR merely manipulates numbers. It makes zero distinctions with respect to an investor’s motivations or investment proclivities. Its data sets do not and can not contain that very personal information which is illusive and likely not stable for any investor. Most investors probably can’t reliably recall their specific trading reasons. That’s okay; it would be scary otherwise.
I’m answering your questions without much updated research. Please access the referenced DALBAR document. Reviewing a primary report is always better than a secondhand source.
I hope this satisfies your curiosity. I really don’t have a test for accuracy, but the distinction between climate and weather is substantial and should be understood and respected. Regardless if individual investors are sophisticated or clueless, they are at a disadvantage when competing against resource rich professionals. Most investors are not especially sophisticated.
Best Wishes.
Well, I'm certainly carrying my full weight in that department!
(1) Let's say Bill who is 25 and not accustomed to saving opens an account with $50, planning on making the subsequent $50 monthly investments his fund house requires of these systematic investment plans. Three months later, having amassed $150 in investments, Bill withdraws the money and closes the account. Does Bill count as an "investor" under Dalbar's guidelines? Certainly, there are a great many like him who open accounts with the best of intentions but close them shortly after.
(2) How does Dalbar treat members of investment clubs in their methodology? As you know, these take their pooled monies and invest in funds and other securities. Does each member, who contributed perhaps $25 a month into the investment pool, count as an individual investor? If so, it would seem a daunting task to gather data about the length of time each member participated as well as the dollar amount contributed to various funds the club owned on his behalf - as membership in these clubs is often quite fluid.
Sorry to pester you with details - but owing to the very high esteem you appear to hold for Dalbar and the faith you profess in their methodology, I'd enjoy learning how the obstacles to arriving at precise definitive conclusions are met with .
Thanks again.
I’m puzzled. Your detailed questions are quickly approaching fetish proportions. They suggest a hidden agenda or a commitment to a belief that is running aground against the rocks of real data. The studies that I have referenced are conceptually very simple money flow balances.
I am not especially attached to the DALBAR work. I only stressed its studies because their reports were highlighted in earlier postings by other MFO members. In my much earlier posts, I often referenced Vanguard, Morningstar, and Academic studies on this subject. All did respectable research on this topic.
I became aware of individual investor shortfalls when I read the research reported by academicians like Barber and Odean. Here are two Links to their informative studies:
http://faculty.haas.berkeley.edu/odean/papers current versions/individual_investor_performance_final.pdf
http://faculty.haas.berkeley.edu/odean/papers/mutualfunds/mfund.pdf
I am surely not an expert on the details of the DALBAR methodology. In fact, I’m not an expert on anyone’s specific research. I would rate my understanding at the familiarity level. But I’ll attempt to answer your extended questions.
The DALBAR procedure is to assemble gross fund money inflows and outflows. DALBAR doesn’t know if those flows are from an individual investor or from a team of investors. They assemble these data and compute average results for a generic Bill, not a specific Bill or Team Bill. DALBAR doesn’t know if Bill is an investor or a speculator, but does report an average holding length.
For the Bill that you hypothesized, I (not DALBAR) would neither classify him as an investor or a speculator. I would label him a candidate Loser investor given his erratic behavior which just increases trading costs. Team Bill would likely be counted as a single investor. All this is just my interpretations. I suggest you contact DALBAR directly for a more definitive answer.
In closing, permit me to emphasize that I’m a rather neutral grader. I don’t hold too many folks in “high esteem”, yet I truly appreciate hard and honest effort, even if it is imperfect.
An insightful line in a John Stewart song, “Mother Country”, nicely captures my general assessment of most folks work ethic and loyalties: “Just a lot of people doing the best they could”. Please give the song a try; here’s a Link to that inspiring American song:
I do have “high esteem” for Stewart’s song writing skills. It’s terrific stuff. I hope you enjoy it as much as I do. The song has many embedded worthwhile lessons and it entertains.
Best Wishes.
I'm sorry you have been offended by my questions.
I would only remind you that it was you who chose to engage me after I commented to Junkster concerning an article Ted had linked.
Regards
These stories get lots of attention and clicks from retail investors.
Example; The darling of the markets, SHAK is getting shaken down after their first quarterly report came out bad. Media pumped this IPO into a frenzy and now they are throwing darts at the balloon.
As for the media, it's effectively "long and short", it's long hype and short when hype disappoints. It's all noise.
I actually did invest a small amount in the Lending Club IPO. I'm very glad I sold when I did because it proceeded to lose about 30% shortly after.
Look at BOX, down 17% after their first earnings call. The CEO is mad at analysts saying they have the share count wrong for their estimate.
Regards,
Ted
sophisticated
adjective
1. Experienced in the ways of the world; lacking natural simplicity:
. (of a person) having a great deal of experience and worldly wisdom, knowledge of how to dress elegantly etc
OLE JOE...YOU QUALIFY
And the readership count keeps increasing. Many thanks to you.
But you have elected far too easy a hurdle when you choose John Wayne as the standard for good looks. Everyone satisfies that standard which, of course, is a necessary qualifier for successful investing.
Please continue your march, good luck, and Best Wishes.