EC Dalbar, 2016: Yes, You Still Stink At Investing (Tips For Advisors)

A couple of years ago I wrote an article discussing Dalbar’s annual Quantitative Analysis Of Investor Behavior study. The study showed just how poorly investors perform relative to market benchmarks over time and the reasons for that underperformance.

With the release of Dalbar’s latest study, I thought it would be prudent to both update, and remind you, of the problems investors continue to face despite the ongoing media and mainstream rhetoric about “investing for the long-term” and other such nonsense.

First of all, let’s dismiss the notion that it is possible for an investor to consistently “beat” an index over long periods of time.

It isn’t.

Indexes do not account for the impact of taxes, trading costs, and fees, over time. There are also internal dynamics of an index that affect long term performance which does not apply to an actual portfolio such as share buybacks, substitution, and market-cap valuation. 

However, even the issues shown above do not fully account for the underperformance of investors over time. The key findings of the study show that:

  • In 2015, the average equity mutual fund investor underperformed the S&P 500 by a margin of 3.66%. While the broader market made incremental gains of 1.38%, the average equity investor suffered a more-than-incremental loss of -2.28%.
  • In 2015, the average fixed income mutual fund investor underperformed the Barclays Aggregate Bond Index by a margin of 3.66%. The broader bond market realized a slight return of 0.55% while the average fixed income fund investor lost -3.11%.
  • In 2015, the 20-year annualized S&P return was 8.19% while the 20-year annualized return for the average equity mutual fund investor was only 4.67%, a gap of 3.52%.

(Click on image to enlarge)


Here is a visual of the lag between expectations and reality.


However, here are some key findings:

Diversification is a myth.

“Asset classes tend to become more correlated during market corrections, somewhat muting the benefits of diversification and necessitating a downside protection strategy that goes beyond traditional diversification.”

In other words, when the next recessionary market correction comes, not having a “sell discipline” or a “hedging strategy” is going to expose investors, and clients, to substantial capital destruction. This will particularly be the case in high yield, dividend based investments where investors and advisors have been crowding assets.

Poor Recommendations Not A Problem

“No evidence has been found to link predictably poor investment recommendations to average investor underperformance. Analysis of the underperformance shows that investor behavior is the number one cause, with fees being the second leading cause.”

As I will discuss more in a moment, given the high correlation across the markets, sectors and asset classes, poor recommendations are somewhat muted. As is always the case, a ramping bull market hides investor mistakes – it is the bear market that reveals them. However, it is psychology and fees that are the leading causes of underperformance during a bull market advance.

Advisors Must Be Psychologists

“Acting in the investor’s best interest should include affirmative practices to curb harmful behaviors.”

Why You (Still) Suck At Investing

Accordingly to the Dalbar study, the three primary causes for the chronic shortfall for both equity and fixed income investors is shown in the chart below.


Notice that while “fees” are important to overall returns, they are not a key issue to the majority of underperformance by individual investors. As shown above, the key issues come down to primarily a lack of capital to invest and psychology.

As stated, the issue of “costs” are an important consideration when choosing between two specific investment options; however, the emotional mistakes made by investors over time are much more important.  Let’s examine each of these issues.

Lack Of Capital

Over the last few years, the investing public has been consistently bashed by the mainstream media and analysts for“missing the rally.”Of course, it would be helpful if Wall Street had not been telling individuals to stay invested during the last two bear market corrections that wiped out a tremendous amount of investible wealth. (More on that in a moment.)

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Disclosure: The information contained in this article should not be construed as financial or investment advice on any subject matter. Streettalk Advisors, LLC expressly disclaims all liability in ...

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