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The title should read individual investors are smarter than institutional investors.
Excerpt from the article, "But a new study, “ETFs: For the better or bettor?” conducted by the Vanguard Group shows that individual investors are not ruining their portfolios with reckless trading of ETFs.
Joel Dickson, one of the study’s authors and a principal in Vanguard’s Investment Strategy Group, noted that critics’ presumptions about ETF trading are based on turnover data dominated by institutional traders making rapid computerized program trades, but does not reflect individual investors.
Vanguard analyzed more than 3.2 million transactions in more than 500,000 positions held in traditional mutual fund and ETF share classes of four different Vanguard index funds from 2007 through 2011. The results showed that even in the most pressure-packed of times — such as the “Flash Crash” of May 2010 — “claims of speculative trading behavior by ETF investors just were not supported by the data,” Dickson said."
Ted, thank you for the fine reference. It prompted me to think more deeply about how to interpret statistical works and to consider their potential shortcomings.
The Vanguard research that Ted linked serves as an excellent illustration of the matter. It did not dwell on the limited group that was examined.
I would not be too sanguine about the results of that very restricted survey. It is heavily skewed, perhaps I should say biased, by the individual investors that formed its population draw.
The survey was restricted to Vanguard clients who only purchased four categories of Index funds. These clients are not representative of global players.
It is not a far reach to assert that this population of investors share a common financial profile. As a group, they tend to be conservative investors with infrequent trading habits. They are cost conscientious. They do not actively seek positive Alpha (excess returns above market rewards). They are a small, but admittedly growing, fraction of the investing public.
As a consequence, they are slow moving and exhibit inertia to hotly touted financial products. As a cohort, I expect that their holding period for all financial positions in general is much longer than any global average. In no way am I shocked by the conclusion that this staid cohort retains its overall investment characteristics and do not trade ETFs very actively. To do otherwise would deviate from their DNA.
But this group of Vanguard customers are definitely not fully representative of the mutual fund/ETF buyer population as a whole.
It’s like the infamous Chicago Tribune headline that reported Dewey defeated Truman in the 1948 presidential election. It reflected improper survey techniques that generated bad forecasts. In that instance, the polling was not representative of the voting population. Rather, it was biased by selection methods that favored those who owned telephones at the time, and by expert opinion that proved faulty. Biased inputs produce bad predictions.
More comprehensive and complete studies demonstrate time after time that private investors do not secure market equivalent returns (returns adjusted for risks accepted). They underperform by rather large percentages that reflect a mix of lack of knowledge, impatience, lack of persistence, poor timing, and herding instincts. Of course, MFO participants do not succumb to these wealth stealing vices. Sure we don’t. But we do tend to be overconfident and somewhat distort the past with an error prone hindsight bias.
Although the referenced article was written by a credible financial writer, you guys might be interested in the original source. Primary sources are always informative, and when honestly presented, identifies its own shortfalls.
Comments
Excerpt from the article, "But a new study, “ETFs: For the better or bettor?” conducted by the Vanguard Group shows that individual investors are not ruining their portfolios with reckless trading of ETFs.
Joel Dickson, one of the study’s authors and a principal in Vanguard’s Investment Strategy Group, noted that critics’ presumptions about ETF trading are based on turnover data dominated by institutional traders making rapid computerized program trades, but does not reflect individual investors.
Vanguard analyzed more than 3.2 million transactions in more than 500,000 positions held in traditional mutual fund and ETF share classes of four different Vanguard index funds from 2007 through 2011. The results showed that even in the most pressure-packed of times — such as the “Flash Crash” of May 2010 — “claims of speculative trading behavior by ETF investors just were not supported by the data,” Dickson said."
Ted, thank you for the fine reference. It prompted me to think more deeply about how to interpret statistical works and to consider their potential shortcomings.
The Vanguard research that Ted linked serves as an excellent illustration of the matter. It did not dwell on the limited group that was examined.
I would not be too sanguine about the results of that very restricted survey. It is heavily skewed, perhaps I should say biased, by the individual investors that formed its population draw.
The survey was restricted to Vanguard clients who only purchased four categories of Index funds. These clients are not representative of global players.
It is not a far reach to assert that this population of investors share a common financial profile. As a group, they tend to be conservative investors with infrequent trading habits. They are cost conscientious. They do not actively seek positive Alpha (excess returns above market rewards). They are a small, but admittedly growing, fraction of the investing public.
As a consequence, they are slow moving and exhibit inertia to hotly touted financial products. As a cohort, I expect that their holding period for all financial positions in general is much longer than any global average. In no way am I shocked by the conclusion that this staid cohort retains its overall investment characteristics and do not trade ETFs very actively. To do otherwise would deviate from their DNA.
But this group of Vanguard customers are definitely not fully representative of the mutual fund/ETF buyer population as a whole.
It’s like the infamous Chicago Tribune headline that reported Dewey defeated Truman in the 1948 presidential election. It reflected improper survey techniques that generated bad forecasts. In that instance, the polling was not representative of the voting population. Rather, it was biased by selection methods that favored those who owned telephones at the time, and by expert opinion that proved faulty. Biased inputs produce bad predictions.
More comprehensive and complete studies demonstrate time after time that private investors do not secure market equivalent returns (returns adjusted for risks accepted). They underperform by rather large percentages that reflect a mix of lack of knowledge, impatience, lack of persistence, poor timing, and herding instincts. Of course, MFO participants do not succumb to these wealth stealing vices. Sure we don’t. But we do tend to be overconfident and somewhat distort the past with an error prone hindsight bias.
Although the referenced article was written by a credible financial writer, you guys might be interested in the original source. Primary sources are always informative, and when honestly presented, identifies its own shortfalls.
Here is the Link to the July Vanguard study:
https://advisors.vanguard.com:443/VGApp/iip/site/advisor/researchcommentary/research/article/IWE_InvResBetter
Enjoy.
My general observation is that we are not as smart as we think. I include myself in that grouping.
Best Regards.