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DALBAR Reveals Investor Shortcomings

edited June 2012 in Fund Discussions
Hi Guys,

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.(8) 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:

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.

Best Regards.


  • Thanks MJG. That's good stuff and from my experience I agree with their findings.

    One way I've quelled the emotional side of my investing (buying and selling at the wrong times) has been to buy and hold funds that are flexible in their allocation and will make the call when to become conservative or fully invested. It's quite possible I'm fooling myself thinking these funds are any better then me at this, but if I use past returns data on certain managers skills it appears they are. Funds like FPACX, YAFFX, ARIVX and MACSX are funds that fit this bill for me.

    Another thing I've swayed from is to think I can pick the hot sector fund. For me, picking hot sectors, whether it be gold miners, China, India, a tech fund or any other sector or country specific fund was just following the heard and usually getting in after they made most of there run. All sector runs become bubbles and revert back to the mean. And getting out before the reversion if tough. If you do own a sector fund, it probably should be because you have a strong belief that that small slice of the investment world should be over weighted over a very long period of time. Now I carry a couple diversified allocation type funds like PRPFX and PGDPX. These funds hold multiple sectors that should balance out the ride.

    Just my 2cents from what I've learned about my own investing behavior.
  • Hi MikeM,

    Thanks for your informative contribution. You enhanced the dialogue with your perceptive comments.

    I suspect we shared some common learning experiences along the poorly marked investment pathway.

    I too did my own stock selection for about three decades using various fundamental analyses, technical plotting, and newsletter tip approaches. Although I had some modest successes, I also suffered a few painful losses. The time commitment added stress to the entire process. In the mid-1980s, I initiated my first mutual fund investment with the Peter Lynch managed Magellan fund.

    In the 1980s, Fidelity allowed Lynch to invest without much in the way of corporate policy constraints. I believe much of his early success could be attributed to the “go anywhere” philosophy that Fidelity permitted Lynch to exercise; he invested in foreign markets long before they became a popular US financial destination.

    As you recall, Lynch retired in 1990 as an active Fidelity fund manager. His replacement, Morris Smith didn’t handle the pressure well, and he was quickly replaced by Jeff Vinik in 1992. I liked Vinik; he guided a size bloated Magellan with an aggressive leadership style. He went where he believed the excess returns were hidden.

    Unfortunately, in the short-term for Vinik, and, eventually in the long-term for Fidelity, Vinik strategically sold equity holdings for bond positions around 1994. That major asset allocation shift failed and Vinik was sacked for his ill-fated market timing. However, he quickly recovered when he established a very successful and profitable Hedge fund operation; I’m not convinced that Fidelity has ever subsequently found a successful manager for its Magellan product.

    I abandoned Magellan soon after Vinik was fired. That was one of my better investment decisions since I moved my Fidelity holdings into their Low Price Stock (FLPSX) and Contrafund (FCNTX) offerings which I still own.

    Like you, I prefer to allow the fund management liberty to make sector and broad category asset allocation moves that reflect their dynamic market assessments. That’s part of why I hire them. It’s not that they are smarter than you or I, but rather they have the resources and time to more fully collect the requisite information, critically assess it, and decide on an action plan. This can be an overwhelming chore for a private investor, irrespective of his market instincts, savvy, and skill set.

    I suppose that is the primary reason why members of the MFO community are so committed to the mutual fund/ETF approach to constructing a portfolio. Investing in individual stocks is a deep, time-consuming sinkhole.

    It is indeed hard to escape the emotional aspects of investment decision-making. Using mutual funds and ETFs help. For some, even this tactic fails to quell the anxiety factor. At that level, perhaps hiring a financial advisor would provide some needed relief. I think most MFO participants do not suffer this malady.

    Best Wishes.
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