It’s the same old story year after year according to DALBAR.
On average, investors continuously fail to realize market returns in either the equity field or the bond field.
DALBAR has been reporting the results of investor mal-performance for over 18 years. During this extended period, the average investor’s composite performance record in both the equity and fixed income arenas has been consistent – consistently bad.
DALBAR’s 2012 Quantitative Analysis of Investor Behavior (QAIB) report reconfirms its investor rewards findings year after year. The average investor sacrifices returns because of inadequate money management discipline and undisciplined market trading. The 2011 results were an anomaly only in the sense of its outsized magnitude.
For 2011, equity investors lost 5.73% in their portfolio contrasted to the gain of 2.12% that the S&P 500 Index benchmark generated. Investors were especially bad in their entry/exit points during 2011.
The fixed income investor collected a positive return of 1.34% for 2011. That outcome was significantly below its appropriate benchmark.
By any reasonable measure of performance, the general public was particularly poor market timers in 2011. The data shows that their 2011 performance was dismal, but could be generously characterized as an outlier. Over longer timeframes, the average investor has indeed done poorly relative to respectable benchmarks, but not as poorly as registered in 2011.
Using the S&P 500 equity Index and the Barclay’s Aggregate Bond Index as standards, the referenced DALBAR document demonstrates that investors are consistent underachievers over long time periods.
For the last 5, 10 and 20 year measurement periods, investors underperformed the equity index by -1.96, -0.53, and -4.32 percent, respectively. For the same bond cycles, investors underachieved by -5.55, -4.85, and -5.56 percent, respectively. If nothing else, investors are predictable and consistent. These data were also taken from the April 2012 DALBAR QAIB report.
Here is a list of explanations offered by DALBAR that summarizes the reasons for the poor performance. The list draws heavily upon the behavioral research emerging science. It appeared in earlier editions of the annual QAIB report and is reproduced below.
(1) Loss Aversion: Expecting to find high returns with low risk.
(2) Narrow Framing: Making decisions without considering all implications.
(3) Anchoring: Relating to the familiar experiences, even when inappropriate.
(4) Mental Accounting: Taking undue risk in one area and avoiding rational risk in others.
(5) Diversification: Seeking to reduce risk, but simply using different sources.
(6) Herding: Copying the behavior of others even in the face of unfavorable outcomes.
(7) Regret: Treating errors of commission more seriously than errors of omission.
Media Response: Tendency to react to news without reasonable examination.
(9) Optimism: Belief that good things happen to me and bad things happen to others.
DALBAR charges to gain entrée to their annual QAIB. However, some websites provide free access. Here is one such site with one version of the 2012 report: http://thewpi.org/pdf_files/dalbar.2012.roccy.pdf
If you have the interest, please enjoy it.
Market returns are historically very volatile. That is surely one of the risk dimensions for equity investments. Here is a nice returns distribution summary compiled by the Ibbotson organization that orders the annual returns in a friendly manner.
Years with returns:
Greater than 45% 3
Between 30% and 45% 15
Between 15% and 30% 24
Between 5% and 15% 15
Between -5% and 5% 10
Between -15% and -5% 13
Between -30% and -15% 3
Worse than -30% 3
This simple table should help keep our expectations inline with market reality. Good stuff.
A few months ago I promised to report the DALBAR findings when they were published. Sorry for my delay in fulfilling that promise. To recover, I added a few lagniappes (a small gift to a treasured customer) as compensation for my negligence.