Hi Guys,
Early each year for the past 17 years, Dalbar releases a report that measures the market performance of individual investors against reasonable benchmarks. It includes the relative performance of these private investors in both the equity and fixed income arenas. The name of that annual scorecard is the “Quantitative Analysis of Investor Behavior (QAIB)” report.
Year after year, Dalbar concludes that individual investors are both absolute and relative poor investors, and capture only a small fraction of market rewards. Dalbar believes that investors move in-and-out of the markets using faulty tools, poor timing, and respond to corrosive behavioral factors that all contribute to the sub-par performance.
In many of their annual editions Dalbar remarks that “When the going gets tough, investors panic”. Maybe so historically, but evidence is accumulating that challenges this pessimistic and unkind characterization.
To support their assertion, Dalbar emphasizes average investor equity and bond returns over the most recent 20-year period. Because of its basic construction, this rolling 20-year averaging methodology has much embedded hysteresis (stale data lag effects). This lag-like behavior is a by-product of its rather lengthy data collection period.
For its 2011 edition, which contains data through 2010, Dalbar quotes a 20-year average investor equity fund annual return of 3.83 %. The S&P 500 average return for that same period was 9.14 %. This finding is consistent with Dalbar results tracing backward for over a decade.
Therefore, according to Dalbar, us poorly informed investors suffered an unsatisfactory market returns capture ratio (3.83/9.14) of only 0.409. From Dalbar’s purview, we accept all the risk, and are only partially rewarded. A companion Fixed Income data set examined by Dalbar demonstrates similar harmful abridge returns for investors in that alternate asset allocation investment class.
That’s the bad news; but there is a light at the end of this disturbing tunnel. As an investor cohort, we seem to be “slow learning”.
The evidence for that observation is also contained in the Dalbar 2011 QAIB document.
That 2011 report also demonstrates that there is positive erosion to that poor performance record in the shorter timeframe data sets. Although market experts and financial advisors often only quote the 20-year results, a more careful and detailed examination of the other data groupings presented in the referenced document show that investors are learning. And profiting from their experiences.
The 20-year data sets are no longer the sole relevant measures of investor performance. For example, summary data for the last 10 years suggests that the private investor’s composite performance is improving.
To further illustrate this interpretation, in the freshest 5 one-year periods, the investor group both underperformed and overperformed the Index. It was a mixed bag in terms of benchmark comparisons. For the last 1-year, 3-year, 5-year, and 10-year periods, private equity investors have bounced both above and below the Index Capture Ratio standard. Indeed, we seem to be slow learning.
Unfortunately, our learning has not improved our decision-making in the Fixed Income arena. We still underperform a Barclays Aggregate Bond Index by an unhealthy margin, almost without exception. However, one exception was that we did improve our Fixed Income Capture Ratio for 2010. Let’s keep that momentum going.
My interpretation of this encouraging finding is that easy access to information, more investment options, cost containment products, and a better understanding of market dynamics and our own emotions have contributed to our more informed and better investment decision-making, at least within the equity marketplace.
I also believe that exposure and participation in web forums such as FundAlarm and Mutual Fund Observer are yet other enhancing factors in the investor educational equation.
Here is a Link to the 2011 Dalbar QAIB report:
http://www.preservationcapital.us/Forms/2011QAIB.pdfLet’s continue this positive march.
Best Regards,
Comments
As always, thank you for your efforts.
I really should have my head already on the pillow; but will throw out a few comments.
NOTE: I have not yet read the linked report.
Over a 35 year period I have found among those I have known and know in various professions; that no more than 2% of these individuals have much knowledge of the smallest factors that may affect their investments for today or what the future may present for those investments.
I once established an investment club in 1985 (14 folks) to help others attempt to learn about how to invest their monies. Today, when I speak with a few of these people, they only mention....shoulda or coulda....taken the time to learn. The club had a 5 year life span with little participation, before having the plug pulled.
About 15% of these folks over this 35 year period; decided to use "advisors" with very mixed results. I do not know any of their advisors who kept them from the fires of the market melt of 2008. And of course, many of these folks "forced" their advisors to unload near the bottom; after seeing week after week of their portfolio continue downward.
I don't know whether the linked report identifies who the investors may be; but one must presume a large number who invest through 401k, 403b, 457 accts and related. I will presume the vast majority of these type investors have very little knowledge of where to put their money and many have very poor choices available with these plans.
Summation: It has been and remains very clear that the vast majority of adults in this country have little knowledge about the most basic of monetary functions; beginning with the most simple aspect of a home budget. No report about poor investment returns by the general public, retail investor not doing well with returns surprises me.
Sadly, these ill equipped adults have nothing to pass along to the children; except more bad habits.
Take care,
Catch
Thank you for sharing your observations and your interpretations of those observations with all of us. You make a compelling case.
I had similar experiences and have arrived at nearly identical conclusions with regard to our individual investor class skill set. As a group, we have been coddled and have been much abused by the flimflam tactics of charlatans. Although some of our investment underperformance is due to these fraudulent, self-proclaimed experts, I suspect that much of our victimization is due to our own greed, fear, herding, and overconfidence. As a cohort, we literally beg to be victims by our lack of basic market understanding and our limited mathematical skills.
For almost two decades I have been visiting the Las Vegas MoneyShow on a regular basis. For the most part, those in attendance can be easily classified as successful individuals. Many are very knowledgeable and disciplined investors. However, I am always amazed by the huge subset that are only attending to collect specific stock tips. The hucksters and the market touts have a field day with these poor souls. These folks almost never listen to the many seminars that are designed for educational purposes.
I am not denigrating this uninformed group of investors. I have been an investor for over five decades; I certainly counted myself as a solid member of that unfortunate cohort for at least three of those decades. I actively searched for stock tips. I became a slave to technical methods (My first investment book purchase in the late 1950s was the Edwards and Magee classic “Technical Analysis of Stock Trends” that I religiously exercised with pencil and graph paper). I visited wire houses frequently, and subscribed to several financial newsletters that promised outsized rewards. None delivered.
Although I enjoyed some limited successes, I suffered many more painful disappointments. Investing was never as easy as Peter Lynch suggested in his well known book “Beating the Street”.
I only began to extricate myself from the financial hole that I had dug for myself (with just a little encouragement from my broker friends), when I bought Burton Malkiel’s “A Random Walk Down Wall Street”. That book inspired me to become a more disciplined, a more patient, a more persistent, and a much more knowledgeable investor.
I have not stopped learning since the early 1980s, but I am by nature a “slow learner”. I continue my painful and fragile removal from the uninformed class of investors who often accept too much market risk, and are not fully compensated for that risk.
The not so secret means to removal from that failing club are a better understanding of market fundamentals and momentum, some macroeconomics, a decision-making discipline, cost containment, and recognition of destructive behavioral traps. Underpinning all these techniques is a familiarity with mathematics, particularly statistics and probability theory. In an uncertain investment universe, statistics and probability are the only tools that can bring some order to a very chaotic environment.
I am not now an active investor and my trajectory is to become even less active with the passage of each year. I have few financial regrets and even fewer axes to grind.
My only purpose in participating in this forum is to encourage members to become more conversant with mathematical concepts and with the findings from relatively pure academic research. I trust if you master these subjects to even a small degree, you will become a more successful investor. Late in my investment career, I did and was rewarded handsomely.
Again, thank you for your insightful commentary.
Best Wishes,
MJG