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.
Support MFO
Donate through PayPal
Looking at the Dalbar Mutual Fund Study from a different perspective
Mark, thanks for the reference. I was aware that the DALBAR QAIB document was somewhat controversial and not universally accepted in some quarters. The critique is fair.
But I would take exception to the case for an alternate interpretation of the DALBAR data. The data is the data. It is probably more productive to challenge the data collection procedure and the possible contaminating impact of alternate trading causes.
I do acknowledge that the methodology is imperfect, so the results can be distorted to a degree. That can be said for almost all modeling exercises which are merely real world approximations. That should always be remembered and honored in its assessment. The goal is that the models are sufficiently complete to capture the major interactions.
Some events are not pathways dependent, but investment end wealth is not one of them. During any timeframe end wealth is indeed a function of the specific pricing fluctuations during that period. That’s why end wealth depends on compound (geometric) rate of return and not simply on average annual results. The average return rate must be corrected for return volatility (standard deviation).
The procedure used by DALBAR only corrects for this time variability in a gross, imprecise manner. It collects end of month measurements. Likewise, the Morningstar attempt at this same type of comparative performance results (individual to benchmark) suffers from a similar deficiency. The modeling shortcoming does make the exact performance gap numbers less accurate, but does not invalidate the overarching conclusion: investors fail to realize benchmark rewards.
I reach this conclusion by recognizing the overall random time nature of individual entry and exit positions. It is a chaotic jungle that likely obeys no discernable pattern. So it is highly likely that investor trades will NOT be focused in one partial timeframe over another; wide time trading dispersion will be the rule rather than the exception.
Note that those who attack the DALBAR findings construct unlikely buying/selling patterns to illustrate their counterarguments. Yes these do happen, and for short periods investors will outperform the marketplace; that’s why DALBAR emphasizes the 20-year rolling average. By the way, their annual QAIB report always shows the comparison for the last year by itself. Typically, the single year data mirrors the 20-year composite.
Caution must be exercised when reviewing any report that is generated by a vested interest: DALBAR is surely a vested interest with an incentive to disparage the private investor in favor of the professional. So buyer beware applies in this instance.
The bottom-line is that investment models are never exact so findings must be absorbed with some skepticism. That’s why a search for and examination of other independent sources are critical. The Morningstar analyses serve that purpose just a little with regard to the DALBAR work; the methods nearly duplicate one another. The analyses are too similar to provide two truly independent assessments of the issue. But the academic world has also contributed in this arena using different procedures.
Most notably, I have consistently reported on the studies of Brad Barber and Terrance Odean from the University of California. They initiated research on this subject in the late 1980s and continue to this day. They have examined the specific trading habits of thousands and thousands of individual investors over long timeframes. Barber and Odean, and numerous other researchers, have expanded their work to the international level.
Barber and Odean have recently (September 2011) published a comprehensive survey paper on this topic. Here is a Link to it:
It is massive in scope and includes summaries of data and findings from numerous other academic researchers in the field. Here is a partial reproduction of their summary conclusions:
“……. In theory, investors hold well diversified portfolios and trade infrequently ,,,,,. In practice, investors behave differently. They trade frequently and have perverse stock selection ability, incurring ,,,,,,,, return losses. They tend to sell their winners and hold their losers, ……. 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.”
If nothing else, Barber and Odean are persistent warriors who do yeoman duty. In most instances they collected their database by painstaking examination of individual investor records on a trade-by-trade basis. That’s a total departure from the DALBAR technique.
Over and over again they conclude that trading is hazardous to end wealth. At various times they conclude that frequent trading is a wealth killer, that women are superior traders over men mostly because of overconfident trading frequency, and that newly purchased stocks underperform those just traded away. These researchers blame the lack of performance not on intelligence factors, but mostly on behavioral biases.
Overall, the academic research delivers compelling independent evidence that supports the DALBAR findings. The absolute value of the numbers may be a little flakey because of incomplete modeling imperfections that are difficult to eliminate, but the general trajectory is really clear. I trust the overarching conclusions of this aggregate and diverse body of researchers using a variety of measurement techniques.
In study after academic study, the conclusions buttress the DALBAR consistent findings while simultaneously refuting the myth that private investors can outwit both the marketplace and the professionals that now dominate it. Peter Lynch was wrong. The professional JP Morgan will out trade the amateur Joe Sixpack in the trading pit. Today, when Joe rolls the dice, it is very likely that a JP partner is taking the other side of the gamble. Who do you think has the gambler’s edge?
We investors must resist the devil that is embedded in our behavioral instincts to trade too often doing our end wealth irreparable damage.
I have not a clue as to what dollar value or percentage of individual investments are reflected in any of the data over a given time period; but I will also note, at least relative to the dollar cost averaging aspect for individual investors that I know and have known many folks over a 20 year period who participate in retirement plans (401k, 403b, 457, etc.) who place monies into these plans only to the point of obtaining a full match amount from the employer; and then do not contribute more. One would suspect that at least some of the data outcomes are skewed by dollar cost averaging related to these folks and that contributions may no longer be in place after the mid-year point of a given year.
Past the study and the broad implications one way or another; it does not affect investment behavior at this house.
Thanks for the post, Mark; and to the followup comments from all.
Thanks for your reading and response time commitment.
The studies included a large and diverse number of participants so the conclusions are well grounded and documented. Barber and Odean alone reviewed the trading history of multiple hundreds of thousands of investors.
I too know a few folks who elect not to rebalance and/or refuse to accept a matching or near matching employer contribution to their savings/investment program. I regard these actions as almost criminal in character.
I have an unkind but descriptive name for these misguided souls: financial losers.
Comments
Mark, thanks for the reference. I was aware that the DALBAR QAIB document was somewhat controversial and not universally accepted in some quarters. The critique is fair.
But I would take exception to the case for an alternate interpretation of the DALBAR data. The data is the data. It is probably more productive to challenge the data collection procedure and the possible contaminating impact of alternate trading causes.
I do acknowledge that the methodology is imperfect, so the results can be distorted to a degree. That can be said for almost all modeling exercises which are merely real world approximations. That should always be remembered and honored in its assessment. The goal is that the models are sufficiently complete to capture the major interactions.
Some events are not pathways dependent, but investment end wealth is not one of them. During any timeframe end wealth is indeed a function of the specific pricing fluctuations during that period. That’s why end wealth depends on compound (geometric) rate of return and not simply on average annual results. The average return rate must be corrected for return volatility (standard deviation).
The procedure used by DALBAR only corrects for this time variability in a gross, imprecise manner. It collects end of month measurements. Likewise, the Morningstar attempt at this same type of comparative performance results (individual to benchmark) suffers from a similar deficiency. The modeling shortcoming does make the exact performance gap numbers less accurate, but does not invalidate the overarching conclusion: investors fail to realize benchmark rewards.
I reach this conclusion by recognizing the overall random time nature of individual entry and exit positions. It is a chaotic jungle that likely obeys no discernable pattern. So it is highly likely that investor trades will NOT be focused in one partial timeframe over another; wide time trading dispersion will be the rule rather than the exception.
Note that those who attack the DALBAR findings construct unlikely buying/selling patterns to illustrate their counterarguments. Yes these do happen, and for short periods investors will outperform the marketplace; that’s why DALBAR emphasizes the 20-year rolling average. By the way, their annual QAIB report always shows the comparison for the last year by itself. Typically, the single year data mirrors the 20-year composite.
Caution must be exercised when reviewing any report that is generated by a vested interest: DALBAR is surely a vested interest with an incentive to disparage the private investor in favor of the professional. So buyer beware applies in this instance.
The bottom-line is that investment models are never exact so findings must be absorbed with some skepticism. That’s why a search for and examination of other independent sources are critical. The Morningstar analyses serve that purpose just a little with regard to the DALBAR work; the methods nearly duplicate one another. The analyses are too similar to provide two truly independent assessments of the issue. But the academic world has also contributed in this arena using different procedures.
Most notably, I have consistently reported on the studies of Brad Barber and Terrance Odean from the University of California. They initiated research on this subject in the late 1980s and continue to this day. They have examined the specific trading habits of thousands and thousands of individual investors over long timeframes. Barber and Odean, and numerous other researchers, have expanded their work to the international level.
Barber and Odean have recently (September 2011) published a comprehensive survey paper on this topic. Here is a Link to it:
http://www.umass.edu/preferen/You Must Read This/Barber-Odean 2011.pdf
It is massive in scope and includes summaries of data and findings from numerous other academic researchers in the field. Here is a partial reproduction of their summary conclusions:
“……. In theory, investors hold well diversified portfolios and trade infrequently ,,,,,. In practice, investors behave differently. They trade frequently and have perverse stock selection ability, incurring ,,,,,,,, return losses. They tend to sell their winners and hold their losers, ……. 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.”
If nothing else, Barber and Odean are persistent warriors who do yeoman duty. In most instances they collected their database by painstaking examination of individual investor records on a trade-by-trade basis. That’s a total departure from the DALBAR technique.
Over and over again they conclude that trading is hazardous to end wealth. At various times they conclude that frequent trading is a wealth killer, that women are superior traders over men mostly because of overconfident trading frequency, and that newly purchased stocks underperform those just traded away. These researchers blame the lack of performance not on intelligence factors, but mostly on behavioral biases.
Overall, the academic research delivers compelling independent evidence that supports the DALBAR findings. The absolute value of the numbers may be a little flakey because of incomplete modeling imperfections that are difficult to eliminate, but the general trajectory is really clear. I trust the overarching conclusions of this aggregate and diverse body of researchers using a variety of measurement techniques.
In study after academic study, the conclusions buttress the DALBAR consistent findings while simultaneously refuting the myth that private investors can outwit both the marketplace and the professionals that now dominate it. Peter Lynch was wrong. The professional JP Morgan will out trade the amateur Joe Sixpack in the trading pit. Today, when Joe rolls the dice, it is very likely that a JP partner is taking the other side of the gamble. Who do you think has the gambler’s edge?
We investors must resist the devil that is embedded in our behavioral instincts to trade too often doing our end wealth irreparable damage.
Best Wishes.
One would suspect that at least some of the data outcomes are skewed by dollar cost averaging related to these folks and that contributions may no longer be in place after the mid-year point of a given year.
Past the study and the broad implications one way or another; it does not affect investment behavior at this house.
Thanks for the post, Mark; and to the followup comments from all.
Hi-ho, hi-ho.......back to work I go.
Regards,
Catch
Hi Catch,
Thanks for your reading and response time commitment.
The studies included a large and diverse number of participants so the conclusions are well grounded and documented. Barber and Odean alone reviewed the trading history of multiple hundreds of thousands of investors.
I too know a few folks who elect not to rebalance and/or refuse to accept a matching or near matching employer contribution to their savings/investment program. I regard these actions as almost criminal in character.
I have an unkind but descriptive name for these misguided souls: financial losers.
Take care.