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FYI: A new study finds that the average investor in all U.S. stock funds earned 3.7% annually over the past 30 years—a period in which the S&P 500 stock index returned 11.1% annually. That means stock-fund investors underperformed the market by approximately 7.4 percentage points annually for three decades, according to Dalbar, a financial-research firm in Boston that has updated this oft-cited study each year since 1994. Regards, Ted http://blogs.wsj.com/moneybeat/2014/05/09/just-how-dumb-are-investors/tab/print/
"That means stock-fund investors underperformed the market by approximately 7.4 percentage points annually for three decades, according to Dalbar, a financial-research firm " Which "Investors" are He referring to?...Just wondering?
If you read Jason's column you can track back to Bob Seawright's essay on how advisors can make better decisions, then back again to Seawright'sessay of the same name in Research Magazine. Both make thoughtful arguments.
In the Research Magazine piece you'll find the name of the Dalbar study they're discussing. Googling the title allows you to find the Dalbar Quantititative Analysis of Investor Behavior (2014) study. There you'll get this answer to the question above:
QAIB uses data from the Investment Company Institute (ICI), Standard & Poor’s, Barclays Capital Index Products and proprietary sources to compare mutual fund investor returns to an appropriate set of benchmarks. Covering the period from QAIB’s inception (January 1, 1984) to December 31, 2013, the study utilizes mutual fund sales, redemptions and exchanges each month as the measure of investor behavior. These behaviors reflect the “average investor.” Based on this behavior, the analysis calculates the “average investor return” for various periods.
The Dalbar study, like Morningstar's, uses fund flows as a surrogate for investor returns. That is, if EM stock funds soar in 2015 but have a low level of assets while, say, large growth funds hold trillions but then crash, the former weighs lightly and the latter weighs heavily in assessing how the average stock investor did.
Three follow-up thoughts: (1) Messers. Zweig and Seawright agree that Dalbar is consistent with, though more pessimistic than, the rest of the published research:
... all the relevant studies show that individuals underperform by a significant amount (we tend to buy high and sell low), Dalbar’s data (the study I reference in the piece) shows a gap that’s much larger than the other research. I should have noted that here. But it doesn’t change the primary point — our decision-making isn’t very good and needs to get much better. It just isn’t likely that it’s quite as bad as Dalbar portrays it.
(2) I really dislike the quality of Dalbar's writing. They do a singularly poor job of explaining how they calculate things like the "Guess Right ratio" and their jumbled graphics detract from the argument.
(3) That said, they make important arguments: that the quality of investor decision making has improved steadily over 20 years, that the improvement seems to have plateaued, that investor education programs have limited effect but that there are four strategies that advisors might pursue which would improve investors' prospects.
The suggested approach consists of setting appropriate expectations, controlling investor exposure to risk, monitoring of risk tolerances and presenting forecasts in terms of probabilities.
I’m a huge Jason Zweig fan. I remember him from a few years ago at the Las Vegas MoneyShow. He was one of the few (maybe the only) presenter who scored his previous years recommendations against their subsequent performance, and rated his record below average. That candid honesty immediately won him a fan. His numerous WSJ columns reinforced my respect.
In this current column, Zweig uses DALBAR analysis across a wide time period to conclude that the average individual investor is not especially successful in his/her investing strategies. In fact, given their historically consistent shortfalls, a less generous assessment just might characterize them as being dumb.
But the DALBAR work is not the end voice on this matter. It has been criticized for shortcomings in its analyses method. According to the math wizards, the purported shortcomings accumulate to overstate the investor’s underperformance. The magnitude might be in error, but the trendline remains in negative territory.
As you know, I like to access original data sources. In keeping with that tradition, allow me to suggest a reliable academic source on this matter. I offer a recent survey paper from Brad Barber and Terrance Odean of “Trading is Hazardous to Your Wealth” fame. You may recall that after examining tens of thousands of West Coast trading records, this team concluded that women trade less frequently than men do, and, consequently, outperform them.
Here is a Link to their fine, global summary paper:
This paper was integrated as Chapter 22 in the “Handbook of the Economics of Finance” tome that was released in 2013. At times the paper is very readable; at other times it gets analytical and data dense. It is a worthwhile skim-read with easily understood explanations and with plausible investor rationales suggested.
The Conclusions Section is exceptionally brief and succinct. It is quoted in its entirety as follows:
“ The investors who inhabit the real world and those who populate academic models are distant cousins. In theory, investors hold well diversified portfolios and trade infrequently so as to minimize taxes and other investment costs. In practice, investors behave differently. They trade frequently and have perverse stock selection ability, incurring unnecessary investment costs and return losses. They tend to sell their winners and hold their losers, generating unnecessary tax liabilities. Many hold poorly diversified portfolios, resulting in unnecessarily high levels of diversifiable risk, and many are unduly influenced by media and past experience. Individual investors who ignore the prescriptive advice to buy and hold low-fee, well-diversified portfolios, generally do so to their detriment.”
Comments
Which "Investors" are He referring to?...Just wondering?
In the Research Magazine piece you'll find the name of the Dalbar study they're discussing. Googling the title allows you to find the Dalbar Quantititative Analysis of Investor Behavior (2014) study. There you'll get this answer to the question above: The Dalbar study, like Morningstar's, uses fund flows as a surrogate for investor returns. That is, if EM stock funds soar in 2015 but have a low level of assets while, say, large growth funds hold trillions but then crash, the former weighs lightly and the latter weighs heavily in assessing how the average stock investor did.
Three follow-up thoughts: (1) Messers. Zweig and Seawright agree that Dalbar is consistent with, though more pessimistic than, the rest of the published research: (2) I really dislike the quality of Dalbar's writing. They do a singularly poor job of explaining how they calculate things like the "Guess Right ratio" and their jumbled graphics detract from the argument.
(3) That said, they make important arguments: that the quality of investor decision making has improved steadily over 20 years, that the improvement seems to have plateaued, that investor education programs have limited effect but that there are four strategies that advisors might pursue which would improve investors' prospects. For what interest it holds,
David
I’m a huge Jason Zweig fan. I remember him from a few years ago at the Las Vegas MoneyShow. He was one of the few (maybe the only) presenter who scored his previous years recommendations against their subsequent performance, and rated his record below average. That candid honesty immediately won him a fan. His numerous WSJ columns reinforced my respect.
In this current column, Zweig uses DALBAR analysis across a wide time period to conclude that the average individual investor is not especially successful in his/her investing strategies. In fact, given their historically consistent shortfalls, a less generous assessment just might characterize them as being dumb.
But the DALBAR work is not the end voice on this matter. It has been criticized for shortcomings in its analyses method. According to the math wizards, the purported shortcomings accumulate to overstate the investor’s underperformance. The magnitude might be in error, but the trendline remains in negative territory.
As you know, I like to access original data sources. In keeping with that tradition, allow me to suggest a reliable academic source on this matter. I offer a recent survey paper from Brad Barber and Terrance Odean of “Trading is Hazardous to Your Wealth” fame. You may recall that after examining tens of thousands of West Coast trading records, this team concluded that women trade less frequently than men do, and, consequently, outperform them.
Here is a Link to their fine, global summary paper:
http://www.umass.edu/preferen/You Must Read This/Barber-Odean 2011.pdf
This paper was integrated as Chapter 22 in the “Handbook of the Economics of Finance” tome that was released in 2013. At times the paper is very readable; at other times it gets analytical and data dense. It is a worthwhile skim-read with easily understood explanations and with plausible investor rationales suggested.
The Conclusions Section is exceptionally brief and succinct. It is quoted in its entirety as follows:
“ The investors who inhabit the real world and those who populate academic
models are distant cousins. In theory, investors hold well diversified portfolios and trade infrequently so as to minimize taxes and other investment costs. In practice, investors behave differently. They trade frequently and have perverse stock selection ability, incurring unnecessary investment costs and return losses. They tend to sell their winners and hold their losers, generating unnecessary tax liabilities. Many hold poorly diversified portfolios, resulting in unnecessarily high levels of diversifiable risk, and many are unduly influenced by media and past experience. Individual investors who ignore the prescriptive advice to buy and hold low-fee, well-diversified portfolios, generally do so to their detriment.”
I hope you visit the source material. Enjoy.
Best Regards.