"Investors, How Dumb Are You?"

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
User avatar
Topic Author
Taylor Larimore
Posts: 32842
Joined: Tue Feb 27, 2007 7:09 pm
Location: Miami FL

"Investors, How Dumb Are You?"

Post by Taylor Larimore »

Bogleheads:

Jason Zweig, in today's Wall Street Journal, reports a study by Dalbar financial research firm. The study found that the average investor in all U.S. stock funds earned 3.7% annually over the past 30 years--a period in which the S&P 500 stock index returned 11.1%.
The biggest factor that reduced investor returns is that investors chase returns--jumping aboard after a streak of hot performance and diving over the gunwales after it goes bad. Because of that buy-high, sell-low behavior, investors in the typical fund have a lower average return than the fund itself."
http://blogs.wsj.com/moneybeat/2014/05/ ... investors/

Stay the course.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
BigTom
Posts: 209
Joined: Sat Apr 26, 2014 5:43 pm

Re: "Investors, How Dumb Are You?"

Post by BigTom »

Nice. This is my plan, a few weeks of browsing this forum.
lws6772
Posts: 512
Joined: Mon Oct 06, 2008 5:14 pm
Location: DFW

Re: "Investors, How Dumb Are You?"

Post by lws6772 »

Maybe slightly above average dumb.
Last edited by lws6772 on Sat May 10, 2014 6:13 pm, edited 1 time in total.
livesoft
Posts: 86075
Joined: Thu Mar 01, 2007 7:00 pm

Re: "Investors, How Dumb Are You?"

Post by livesoft »

I've never been impressed with studies from Dalbar and the article suggests they are suspect.

I think Vanguard has done their own studies and shown that Vanguard investors are doing better than Dalbar thinks. Of course, maybe it is because of costs?
Wiki This signature message sponsored by sscritic: Learn to fish.
User avatar
White Coat Investor
Posts: 17409
Joined: Fri Mar 02, 2007 8:11 pm
Location: Greatest Snow On Earth

Re: "Investors, How Dumb Are You?"

Post by White Coat Investor »

Vanguard investors are hardly average.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course
ASUGrad
Posts: 259
Joined: Sun Oct 20, 2013 8:09 pm

Re: "Investors, How Dumb Are You?"

Post by ASUGrad »

Vanguard investors do better because they are better at staying the course. According to Bogle Vanguard ETF owners trade in and out less than other ETF holders. *(edited to add according to Bogle, couldn't find the study that showed this)

I don't know if it is still true, but several months ago it was true. The average investor in the Vanguard Total Stock Index fund actually had HIGHER returns than the fund did going back to 2008. The reason is that people were putting money into the Total stock index in 2008 & 2009 when the market was low faster than they were taking it out when the market was dropping.

It makes sense Vanguard investors would do better. If you believe in indexing then you have to have the wisdom to know that you can't predict the future. If that logic applies to picking stocks then it is only rational it applies to timing the market. With an index fund you also aren't going to blame the manager when the market is down, and your diversified enough that you don't have to worry about losing everything(balance hits 0). However if you pay an advisor or active fund to beat the market then in a down market you aren't going to just blame the market, you will blame the advisor/fund and lose confidence or even fear losing everything... then sell. I've met many investors who think they shouldn't have to pay their advisor if their advisor loses their money. Its a disconnect. They don't understand the market is going to do what it does and you are along for the ride. Which in many cases is the advisors fault for not educating their clients.

Investors are bad about selling when they are scared and waiting to buy until the market is already high. The fact that they have lower returns isn't a surprise. If investors didn't sell during turbulent times then the market wouldn't drop at all in years like 2008. Which just sounds alien.... and as long as that is true investors will earn less than their investments do.
Last edited by ASUGrad on Sat May 10, 2014 9:19 pm, edited 1 time in total.
investor1
Posts: 1050
Joined: Thu Mar 15, 2012 8:15 pm

Re: "Investors, How Dumb Are You?"

Post by investor1 »

I think bonds have a significant impact on overall portfolio return when comparing that return to that of the S&P 500.

I don't doubt far too many US investor have bad behavior, but it surprises me that the delta between portfolio performance and that of the S&P would be caused by that rather than holding bonds and increasing that position over time.
ASUGrad
Posts: 259
Joined: Sun Oct 20, 2013 8:09 pm

Re: "Investors, How Dumb Are You?"

Post by ASUGrad »

Investor1: The study focused on 'stock' fund investors vs the S&P500. Bonds aren't included in the study.
ccieemeritus
Posts: 714
Joined: Thu Mar 06, 2014 9:43 pm

Re: "Investors, How Dumb Are You?"

Post by ccieemeritus »

Two other good articles in the WSJ today. I'm not sure whether these require subscription. Business finance and weekend investor section.

You're paying too much in fees.

http://online.wsj.com/news/articles/SB1 ... reno64-wsj

Tax report regarding erroneous irs guidance on the number of allowed Ira rollovers per year,
And the tax lawyer who tried to take advantage of it (resulting in stricter guidance for all of us going forward).

http://online.wsj.com/news/articles/SB1 ... 1669048814
User avatar
baw703916
Posts: 6681
Joined: Sun Apr 01, 2007 1:10 pm
Location: Seattle

Re: "Investors, How Dumb Are You?"

Post by baw703916 »

I question the methodology. What is the average investor? For me personally, my dollar-weighted return has probably been close to 3%, and it's not because of panic selling or anything else like that.

I wasn't able to start investing in significant amounts until the late 1990s, and I didn't have a lot of money in the market to take advantage of the internet boom. Most of the money I have invested was put in during the 2000s, during which time the market went up and down a lot but didn't have any sustained gains.

So yes, someone who had money in the market in 1984, and who didn't put any in or take any out since then, should have been able to achieve an 11% gain. But I don't know anyone like that, and I doubt that such a person exists. Probably everyone who is still participating in the market today had a lot more invested by 2000 than in 1982, so the dollar weighted returns would be lower just because of the sequence of returns during that period.

In this thread I calculated my (unimpressive) TSP returns over 17 years of contributing.

http://www.bogleheads.org/forum/viewtop ... &p=1969749&
Most of my posts assume no behavioral errors.
hoops777
Posts: 4603
Joined: Sun Apr 10, 2011 12:23 pm
Location: Behind the 3 point line

Re: "Investors, How Dumb Are You?"

Post by hoops777 »

Oh could I share some investing horror stories to define just how dumb someone can be but I choose not to humiliate myself. :D
K.I.S.S........so easy to say so difficult to do.
Grt2bOutdoors
Posts: 25625
Joined: Thu Apr 05, 2007 8:20 pm
Location: New York

Re: "Investors, How Dumb Are You?"

Post by Grt2bOutdoors »

No one is perfect. Even smart people make mistakes sometimes. The key is not to make those mistakes with more than you can bear to lose. And...not to repeat the mistakes. Stay the course.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
bschultheis
Posts: 207
Joined: Mon Jul 23, 2007 10:15 am

Re: "Investors, How Dumb Are You?"

Post by bschultheis »

ASUGrad wrote:Well Vanguard investors do better because studies have shown they are better at staying the course. .
I am kind of winging it on this post, but a couple of years ago Walter Updegrave wrote an article in Fortune detailing a study by either Morningstar and/or Vanguard, showing that owners of the Vanguard 500 fund were just as prone to making wrong decisions at the wrong time, as non Vanguard, non index investors. I brought this up at Boglehead conference last year, and Christine Benz of Morningstar confirmed the same. Has anyone come across this research?

People can criticize the Dalbar study as being faulty, but there is no question the average investor is prone to making wrong decisions at wrong time. On February 7th of this year, WSJ reported that after a small drop in the equity market, there was the largest ever weekly outflow of money from stock funds to bond funds - of course the market had a significant rally the following two weeks.

It doesn't help when reputable rags like the NYT has a picture of Robert Shiller blowing a big bubble with a wad of bubble gum.

Bill
ASUGrad
Posts: 259
Joined: Sun Oct 20, 2013 8:09 pm

Re: "Investors, How Dumb Are You?"

Post by ASUGrad »

bschultheis. It took forever but I found the article.

http://online.wsj.com/news/articles/SB1 ... 1185130932

For context its an article about how people are more likely to abandon a buy & hold strategy when using ETFs than they are mutual funds. The study uses VG funds VS VG ETFs for proving this. So Bogle's comments are to put in context this trend might be even worse with other companies' ETFs.

"Furthermore, the Vanguard study may have underestimated the true extent of the increased trading activity to which ETFs can lead, according to John Bogle, Vanguard's founder. In an interview, he contended that the typical investor in the firm's ETFs trades less actively than investors in ETFs sold by other fund firms."

So I might have been wrong in saying there was a study that showed Vanguard investors are better at staying the course. Bogle said Vanguard ETF holders trade less actively, but I couldn't find the research he was referencing. I read that Bogle said that in an article about another study which is where the confusion came from. I'll edit the previous post to note the change. Thanks for catching it.
User avatar
schuyler74
Posts: 236
Joined: Sat Apr 20, 2013 12:56 am

Re: "Investors, How Dumb Are You?"

Post by schuyler74 »

the article wrote:But the biggest factor is that investors chase returns—jumping aboard after a streak of hot performance and diving over the gunwales after it goes bad. Because of that buy-high, sell-low behavior, investors in the typical fund have a lower average return than the fund itself.

Imagine a mutual fund as the Amtrak train that runs from Chicago to the San Francisco Bay Area. The California Zephyr traverses the entire 2,438 miles, but only the people who get on at the beginning of the trip and get off at the end will go the full distance. Some might get on in Ottumwa, Iowa, and get off in Omaha, Neb., or Denver; others might board in Salt Lake City and stop in Reno, Nev., and so on. The train goes all the way, but not all the passengers do.

Likewise, an investment might earn 6% annually for 10 years—but only those people who held their investment constant for the full decade will match that return. A lucky few might do even better if they bought low and sold high. Most will do worse.
Okay, I'm a Dumb Investor. How can the aggregate group of investors get returns any less than if a single person rode the train from start to finish? The group took the same route the single person would have.

Say Person A buys a stock at $20 and sells it to B at $70. The stock rises to $90 but then falls to $30 where B "dives over the gunwales" and sells it to C. The train started at $20 and ended at $30. A made $50, B lost $40, and C hasn't made/lost anything yet. That's still a net gain of $10, which is exactly where the train went: it gained $10 from start to finish (with the exception of some small fees every time someone got on or off the train).

What's the "math trick" here that I'm not understanding...?
thx1138
Posts: 1164
Joined: Fri Jul 12, 2013 2:14 pm

Re: "Investors, How Dumb Are You?"

Post by thx1138 »

schuyler74 wrote: What's the "math trick" here that I'm not understanding...?
When someone sells a fund there isn't a matched buyer. The flow into a fund does not match the flow out. Or to put it another way the fund does not own a constant number of shares in the companies it invests in. You are confusing how individual stocks trade with how funds trade. A fund can have a thousand sellers in one day with no buyers. A stock cannot.
User avatar
baw703916
Posts: 6681
Joined: Sun Apr 01, 2007 1:10 pm
Location: Seattle

Re: "Investors, How Dumb Are You?"

Post by baw703916 »

ASUGrad wrote: So I might have been wrong in saying there was a study that showed Vanguard investors are better at staying the course. Bogle said Vanguard ETF holders trade less actively, but I couldn't find the research he was referencing. I read that Bogle said that in an article about another study which is where the confusion came from. I'll edit the previous post to note the change. Thanks for catching it.
What you want to compare is the ratio of the average daily trading volumes (in $) of an ETF to its AUM. I spent a little while looking for that info, w/o a lot of success., I recall that a few years back I was able to compare it by ETF sponsor for all their funds. Vanguard was indeed one of the lowest, considerably less than ishares of SSgA.
Most of my posts assume no behavioral errors.
Browser
Posts: 4857
Joined: Wed Sep 05, 2012 4:54 pm

Re: "Investors, How Dumb Are You?"

Post by Browser »

You need to remember these results whenever somebody gins up some past return data to make a point. For example, Jeremy Siegel says that stocks have returned an average annual gain of 7% after inflation over the last 200 years. Well, that guy who is now well over 200 years old and who invested a lump sum at the beginning really made out! Your results may vary.
We don't know where we are, or where we're going -- but we're making good time.
User avatar
schuyler74
Posts: 236
Joined: Sat Apr 20, 2013 12:56 am

Re: "Investors, How Dumb Are You?"

Post by schuyler74 »

Jerry wrote:"If every instinct you have is wrong, then the opposite would have to be right." (YouTube clip)
If following normal, natural emotions provides investors with returns that are less than they could be, then why not just do the opposite of what comes naturally? Just buy more when your gut is telling you to bail, and start selling to those jumping on the bandwagon during a bull run. If the former behavior results in inferior returns, then the latter would have to give you the opposite. Right?
George wrote:I think that you think that a certain something is not all that it could be when, in fact, it is all that it should be, and more!
Browser
Posts: 4857
Joined: Wed Sep 05, 2012 4:54 pm

Re: "Investors, How Dumb Are You?"

Post by Browser »

According to Zwieg, the 11% average stock return "bogey" was based on the assumption that investors put their money into the S&P 500 and left it there -- in other words, that the money was invested as a "lump sum". This isn't typical for many investors, even "buy and hold" investors, who are gradually investing their money from earnings over time. Here's a possible problem with this analysis:

For purposes of argument, let's assume that the annual returns from stocks are normally distributed. As annual returns compound, they are distributed log-normally (skewed); that is, the median return is lower than the mean return, and the modal return (the most likely return) is lower than the median return. So, even if all the investors are true "buy and hold" investors, the most likely return (mode) as well as the middling return (median) will be lower than the average return.

In other words, if investors "would have" received an 11% average annual return, the most frequent compound return (mode) will be considerably lower than this even if they were dedicated Boglehead buy-and-hold investors who invest their money incrementally rather than as a lump sum. This has nothing to do with performance chasing or jumping in and out of the market. We may be mistakenly accusing investors of stupidity, or at least attributing greater stupidity to them than they really deserve. I don't know if this statistical flaw might account to some degree for the results of Dalbar, but it's worth looking into as one explanatory factor.
Last edited by Browser on Sun May 11, 2014 1:13 am, edited 3 times in total.
We don't know where we are, or where we're going -- but we're making good time.
User avatar
jidina80
Posts: 729
Joined: Wed Feb 24, 2010 4:05 pm
Location: Fiji

Re: "Investors, How Dumb Are You?"

Post by jidina80 »

The behavior of the 'average' investor makes a strong case for the contrarian investor - overweight stocks when they're cheap, underweight when they're expensive.
User avatar
JoMoney
Posts: 16260
Joined: Tue Jul 23, 2013 5:31 am

Re: "Investors, How Dumb Are You?"

Post by JoMoney »

Browser wrote:...We may be mistakenly accusing investors of stupidity, or at least attributing greater stupidity to them than they really deserve....
Could be some "smart" tax-loss harvesters moving into other funds with similar returns.. but there "loss" being counted as "dumb".
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
User avatar
noyopacific
Posts: 359
Joined: Wed Jan 28, 2009 5:06 pm
Location: Mendocino

Re: "Investors, How Dumb Are You?"

Post by noyopacific »

Browser wrote:...We may be mistakenly accusing investors of stupidity, or at least attributing greater stupidity to them than they really deserve....
In my less than humble opinion, :wink: my and my wife's beating the S&P 500 over the past 20 years of investing had little (okay, nothing!) to do with being particularly "smart" (speaking only for myself and not my wife.) I think it had more to do with our temperament, reasonable expectations and the judgement to dismiss most of what we heard in the financial media and the first books we read about investing. We eventually read Mr. Bogle and books from a few others that resonated for us.

There was also a significant amount of dumb luck :moneybag in developing and then sticking to a plan (IPS) that included rebalancing to reduce our portfolio risk . . . which just happened to result in some nice, but unexpected rebalancing bonuses.
The information contained herein, while not guaranteed by us, has been obtained from from sources which have not in the past proved particularly reliable.
bpp
Posts: 2017
Joined: Mon Feb 26, 2007 11:35 am
Location: Japan

Re: "Investors, How Dumb Are You?"

Post by bpp »

Why is the gap found by Dalbar so much wider? To calculate investor return, all the other studies use a standard formula that adjusts the results to account for when the performance was earned and when money moved in or out of the fund. Dalbar, however, uses a quirky formula of its own.
[...]
Dalbar’s formula, according to these experts, has the effect of taking returns over the full period and dividing them by the total assets at the end—including money that wasn’t in the funds from start to finish. The result, they say, could significantly inflate the amount by which investors appear to lag behind their funds.
That sounds breathtakingly incompetent.

But weren't these guys already debunked at least 10 years ago?
Why do they still get any press?
User avatar
obgyn65
Posts: 770
Joined: Sun May 06, 2012 9:11 am

Re: "Investors, How Dumb Are You?"

Post by obgyn65 »

My investments are 90%+ in CDs, deferred annuities, and munis. I suppose I am an outlier, which, to many people, sounds "dumb". On the other hand, I have never lost money with my investments.
"The two most important days in someone's life are the day that they are born and the day they discover why." -John Maxwell
maj
Posts: 488
Joined: Wed Jun 25, 2008 2:58 pm

Re: "Investors, How Dumb Are You?"

Post by maj »

obgyn65, I can understand that you have not lost a nominal dollar.
But I wonder if, over the long term, you have not lost purchasing power.
My parents invested solely in CDs but compensated for loss of purchasing power by living in the same home for over 50 years and knowing how to purchase goods at reasonable prices.
They did enjoy great peace of mind with CDs.
manwithnoname
Posts: 1584
Joined: Mon Jul 22, 2013 7:52 pm

Re: "Investors, How Dumb Are You?"

Post by manwithnoname »

bpp wrote:
Why is the gap found by Dalbar so much wider? To calculate investor return, all the other studies use a standard formula that adjusts the results to account for when the performance was earned and when money moved in or out of the fund. Dalbar, however, uses a quirky formula of its own.
[...]
Dalbar’s formula, according to these experts, has the effect of taking returns over the full period and dividing them by the total assets at the end—including money that wasn’t in the funds from start to finish. The result, they say, could significantly inflate the amount by which investors appear to lag behind their funds.
That sounds breathtakingly incompetent.

But weren't these guys already debunked at least 10 years ago?
Why do they still get any press?
They have been debunked.

http://thefinancebuff.com/dalbar-study- ... iming.html

Problem is many financial writers/advisors use the study because it is widely published and is presumed to be reputable. They don't have to turn on their intellectual thought process- just cite the study.

What is overlooked is that metrics can be manipulated. If you want to demonstrate that individual investors are stupid there is someone who will has prepared a study confirming that premise.

All intelligent investors know that all metrics are relative to the period measured.

For example, I have tracked a large cap equity investment that I own back 28 years for an average return of about 8%. I have a similar equity investment in another fund Co that over the last 14 years has gained about 2% a year. In both investments all income was reinvested, no tax was paid and no additional contributions were made. Difference in return is due to first investment benefiting from bull market of the 80's-90's while second investment was invested mostly during 2 bear markets of 40-50%. Is first investment better than the second? Not exactly.

Investors need to engage their critical thinking functions when reviewing investment materials and not just accept what is presented as being correct.
User avatar
ofcmetz
Posts: 2465
Joined: Tue Feb 08, 2011 7:09 pm
Location: Louisiana

Re: "Investors, How Dumb Are You?"

Post by ofcmetz »

obgyn65 wrote:My investments are 90%+ in CDs, deferred annuities, and munis. I suppose I am an outlier, which, to many people, sounds "dumb". On the other hand, I have never lost money with my investments.
You are at risk to losing money to inflation. Of course if your wealth is vast then that may not be a big deal.


As far as the OP, I think that investors on this site are probably doing far better than most by simply holding index funds and avoiding performance chasing.
Never underestimate the power of the force of low cost index funds.
User avatar
House Blend
Posts: 4878
Joined: Fri May 04, 2007 1:02 pm

Re: "Investors, How Dumb Are You?"

Post by House Blend »

bpp wrote:
Why is the gap found by Dalbar so much wider? To calculate investor return, all the other studies use a standard formula that adjusts the results to account for when the performance was earned and when money moved in or out of the fund. Dalbar, however, uses a quirky formula of its own.
[...]
Dalbar’s formula, according to these experts, has the effect of taking returns over the full period and dividing them by the total assets at the end—including money that wasn’t in the funds from start to finish. The result, they say, could significantly inflate the amount by which investors appear to lag behind their funds.
That sounds breathtakingly incompetent.

But weren't these guys already debunked at least 10 years ago?
Why do they still get any press?
+1.

Dumb is a function of strategy and the implementation thereof, not outcome.

Really dumb is not knowing how to measure outcomes. Looks like DALBAR may have earned a dunce cap.
User avatar
obgyn65
Posts: 770
Joined: Sun May 06, 2012 9:11 am

Re: "Investors, How Dumb Are You?"

Post by obgyn65 »

My wealth is not vast. When I look at the results from the net worth survey on bogleheads, I guess it's average. To answer your point, the average interest rate paid from my CDs and munis over the next 10 years is 3.98%. I don't think inflation will be higher over the next 10 years. If it is and the Fed rates go up, I will invest in deferred annuities and laddered SPIAs instead of CDs.

To some posters, I accept this strategy may sound dumb.

ofcmetz wrote:
obgyn65 wrote:My investments are 90%+ in CDs, deferred annuities, and munis. I suppose I am an outlier, which, to many people, sounds "dumb". On the other hand, I have never lost money with my investments.
You are at risk to losing money to inflation. Of course if your wealth is vast then that may not be a big deal.


As far as the OP, I think that investors on this site are probably doing far better than most by simply holding index funds and avoiding performance chasing.
Last edited by obgyn65 on Sun May 11, 2014 8:58 am, edited 1 time in total.
"The two most important days in someone's life are the day that they are born and the day they discover why." -John Maxwell
User avatar
midareff
Posts: 7711
Joined: Mon Nov 29, 2010 9:43 am
Location: Biscayne Bay, South Florida

Re: "Investors, How Dumb Are You?"

Post by midareff »

EmergDoc wrote:Vanguard investors are hardly average.

Totally agree and Boglehead and Vanguard can be used interchangeably in this sentence.
User avatar
nedsaid
Posts: 19275
Joined: Fri Nov 23, 2012 11:33 am

Re: "Investors, How Dumb Are You?"

Post by nedsaid »

Investor behavior is the biggest driver of investor returns. Buy low, sell high has never gone out of style. Performance chasing in good markets and selling in bad markets causes people to do the opposite. It is no wonder why many investors underperform the market indexers.

The second driver of investor returns is choice of asset classes and a third driver would be the costs of investing. Portfolio turnover also helps determine returns, usually the less the better.
A fool and his money are good for business.
Leeraar
Posts: 4109
Joined: Tue Dec 10, 2013 7:41 pm
Location: Nowhere

Re: "Investors, How Dumb Are You?"

Post by Leeraar »

If you invest the same periodically (monthly) in a fund, the amount invested over a year will only show half the market performance that year. I don't think that explains it all.

Morningstar calculates net cash inflows and outflows from mutual funds. The methodology is explained on their site. There is no question that net inflows in good times become net ouflows in bad times.

L.
You can get what you want, or you can just get old. (Billy Joel, "Vienna")
Browser
Posts: 4857
Joined: Wed Sep 05, 2012 4:54 pm

Re: "Investors, How Dumb Are You?"

Post by Browser »

They have been debunked.

http://thefinancebuff.com/dalbar-study- ... iming.html
TFB's provides a clear example of the problem with Dalbar. More generally, as I discussed above, the problem is that - if we assume the distribution of annual stock returns is normal or nearly-normal, the distribution of cumulative, or compounded, returns will be highly skewed, or log-normal. The mean of the return distribution is much higher than the most likely, or modal, return. On the basis of probability, a buy-and-hold investor is likely to end up with a much lower return than the mean return. It has nothing to do with market timing or not staying the course. It has to do with probability distributions. If everyone who is investing in stocks holds their stocks forever, most of them will end up with returns that are lower than the mean return. Your ending wealth is not likely to be as high as the average of the return distribution even if you stay the course.
We don't know where we are, or where we're going -- but we're making good time.
User avatar
baw703916
Posts: 6681
Joined: Sun Apr 01, 2007 1:10 pm
Location: Seattle

Re: "Investors, How Dumb Are You?"

Post by baw703916 »

Leeraar wrote:If you invest the same periodically (monthly) in a fund, the amount invested over a year will only show half the market performance that year. I don't think that explains it all.
Well, more precisely, on the average your money would have been invested for six months. That only equates to half of the total return for the year if returns were fairly constant over the entire time period. The issue with the 1984-2014 example is that equities returns were fantastic for the first 15 years and lousy for the second 15 years.

For a hypothetical buy and hold investor who had a certain amount of money in the market in 1984, and then made regular contributions ever since then to the present, and never sold--what would their return be? In particular, what would the annualized return be when averaged over every dollar invested?

On the dollars they already had invested in 1984 and left there the entire time, it would be 11%. For dollars invested in 1999-2000 it would be very low (~3%). For dollars invested in 2009, it would be very good. etc. But overall, it can't be anywhere close to 11% because nearly all of the returns occurred in the first 15 years, when the investor had less money invested.
Morningstar calculates net cash inflows and outflows from mutual funds. The methodology is explained on their site. There is no question that net inflows in good times become net ouflows in bad times.
Certainly behavior can and does make things worse. I don't disagree with the conclusion that investors often shoot themselves in the foot. I just don't think the data support that conclusion as strongly as claimed.
Most of my posts assume no behavioral errors.
ASUGrad
Posts: 259
Joined: Sun Oct 20, 2013 8:09 pm

Re: "Investors, How Dumb Are You?"

Post by ASUGrad »

Browser wrote:According to Zwieg, the 11% average stock return "bogey" was based on the assumption that investors put their money into the S&P 500 and left it there -- in other words, that the money was invested as a "lump sum". This isn't typical for many investors, even "buy and hold" investors, who are gradually investing their money from earnings over time. Here's a possible problem with this analysis:

For purposes of argument, let's assume that the annual returns from stocks are normally distributed. As annual returns compound, they are distributed log-normally (skewed); that is, the median return is lower than the mean return, and the modal return (the most likely return) is lower than the median return. So, even if all the investors are true "buy and hold" investors, the most likely return (mode) as well as the middling return (median) will be lower than the average return.

In other words, if investors "would have" received an 11% average annual return, the most frequent compound return (mode) will be considerably lower than this even if they were dedicated Boglehead buy-and-hold investors who invest their money incrementally rather than as a lump sum. This has nothing to do with performance chasing or jumping in and out of the market. We may be mistakenly accusing investors of stupidity, or at least attributing greater stupidity to them than they really deserve. I don't know if this statistical flaw might account to some degree for the results of Dalbar, but it's worth looking into as one explanatory factor.
How would dollar cost averaging figure into this? If investors are putting the same amount of $ into the market over time then they are benefiting from short term down markets as long as the market trends up(which it has). For awhile(might still) investors in the VG Total Stock index actually had higher returns than the fund did. This was because they were still buying during the lower market of 08 & 09. Continuing to contribute during short term volatility gave them higher long term returns than the fund earned itself... the perfect example of dollar cost averaging at work. Other funds have lower investor returns than fund returns because people were taking out rather than putting in during 08 and other down markets. It seems like with dollar cost averaging the perfect buy and hold investor should have higher returns than their fund thanks to adding money when the market is down.
Leeraar
Posts: 4109
Joined: Tue Dec 10, 2013 7:41 pm
Location: Nowhere

Re: "Investors, How Dumb Are You?"

Post by Leeraar »

ASUGrad wrote:How would dollar cost averaging figure into this? If investors are putting the same amount of $ into the market over time then they are benefiting from short term down markets as long as the market trends up(which it has). For awhile(might still) investors in the VG Total Stock index actually had higher returns than the fund did. This was because they were still buying during the lower market of 08 & 09. Continuing to contribute during short term volatility gave them higher long term returns than the fund earned itself... the perfect example of dollar cost averaging at work. Other funds have lower investor returns than fund returns because people were taking out rather than putting in during 08 and other down markets. It seems like with dollar cost averaging the perfect buy and hold investor should have higher returns than their fund thanks to adding money when the market is down.
Funny you should ask.

Image

Taken from "Dollar-Cost Averaging: By the Numbers"

http://www.bogleheads.org/forum/viewtop ... 3#p1953783

Forget about DCA. Relabel the vertical Y axis as "Periodic Investor Return (1-year)". Relabel the horizontal X axis as "Fund Return (1-year)".

The trend line shows that the periodic investor gets half the fund return, but there is a lot of scatter. Isn't this wild? In one case, the fund return is -6% but the investor return is +19%. The original spreadsheet is posted, if you want to see when and how this happened.

By the way, I am not sure I buy all the arguments made here. If you make a series of equal periodic investments, the price you pay is the harmonic mean of the purchase prices. Sequence does not matter.

L.
You can get what you want, or you can just get old. (Billy Joel, "Vienna")
Browser
Posts: 4857
Joined: Wed Sep 05, 2012 4:54 pm

Re: "Investors, How Dumb Are You?"

Post by Browser »

Unfortunately, most investors can't forget about DCA since they must make periodic investments over time based on earnings and have no choice in the matter. Bill Bernstein in his book "Ages of the Investor" makes the point that periodic investing has essentially the same effect as optional DCA: It reduces both the expected compound returns as well as risks in the form of portfolio losses. So, it probably helps accumulating investors to accept a higher equity allocation than they might be willing to accept otherwise. Of course, if you were able to invest it all upfront as a lump sum, the higher expected returns would allow you to accept a lower equity allocation.
Thus, periodic investing provides real downside protection in bad states of the world, at the cost of producing inferior returns relative to lump-sum investing most of the rest of the time.

Bernstein, William J (2012-06-18). The Ages of the Investor: A Critical Look at Life-cycle Investing (Investing for Adults) (Kindle Locations 401-402). Efficient Frontier Publications. Kindle Edition
.
We don't know where we are, or where we're going -- but we're making good time.
Leeraar
Posts: 4109
Joined: Tue Dec 10, 2013 7:41 pm
Location: Nowhere

Re: "Investors, How Dumb Are You?"

Post by Leeraar »

Browser wrote:Unfortunately, most investors can't forget about DCA since they must make periodic investments over time based on earnings and have no choice in the matter. Bill Bernstein in his book "Ages of the Investor" makes the point that periodic investing has essentially the same effect as optional DCA: It reduces both the expected compound returns as well as risks in the form of portfolio losses. So, it probably helps accumulating investors to accept a higher equity allocation than they might be willing to accept otherwise. Of course, if you were able to invest it all upfront as a lump sum, the higher expected returns would allow you to accept a lower equity allocation.
Thus, periodic investing provides real downside protection in bad states of the world, at the cost of producing inferior returns relative to lump-sum investing most of the rest of the time.

Bernstein, William J (2012-06-18). The Ages of the Investor: A Critical Look at Life-cycle Investing (Investing for Adults) (Kindle Locations 401-402). Efficient Frontier Publications. Kindle Edition
.
My point was only that my message was not about DCA. The same chart is evidence for the question about systematic investing and fund total returns.

L.
You can get what you want, or you can just get old. (Billy Joel, "Vienna")
User avatar
Bustoff
Posts: 2033
Joined: Sat Mar 03, 2012 5:45 pm

Re: "Investors, How Dumb Are You?"

Post by Bustoff »

bschultheis wrote:
ASUGrad wrote:Well Vanguard investors do better because studies have shown they are better at "staying the course".
... but there is no question the average investor is prone to making wrong decisions at wrong time.
Like maybe at the end of 2008, when that was a bad time to decide ones stock allocation was too high. Or that the definition of "staying the course" was being translated in ways we never heard before.
hiddensee
Posts: 419
Joined: Fri Feb 07, 2014 3:17 am

Re: "Investors, How Dumb Are You?"

Post by hiddensee »

One of the most interesting articles I read on Monevator is this one, entitled "10 reasons why houses are a better investment than shares". Most of the commenters seem to have interpreted this article as saying that real estate as an asset class offers better returns than equities as an asset class. What the writer actually shows is that the psychological and social context of buying a house "forces" people to invest in a Bogglehead-like way without knowing it, and that's why most normal people have tended to do better with real estate than with equities. A mortgage is basically a legal commitment to put a certain, fairly large, amount of money into your savings pot every month for a number of decades, and to rarely if ever sell the asset that those savings are being invested in. A lot of people view their house as an investment, but the community looking to houses to turn a quick profit by renovating and selling them in a short time is much smaller. Not a lot of people with positive equity and enough money to meet their repayments were desperate to cash out their houses in 2008 for instance, whereas lots of people in an otherwise decent financial position were desperate to cash out their shares.

With stock investments, the psychological and social context is precisely opposite. More often than not when I (rarely) hear people talking about the stock market it's about something like day trading, "hot tips", and so forth. The general public treat buying houses as steady accumulation of wealth, stock investments more like a day at the horse races. They also, while much slower to put it in as many words, see savings and retirement as a low priority or simply not one at all when it comes to allocating their income, while mortgage repayments are a very high priority. It's very rare you'll find someone who will put aside 10-20% of his salary for investments before even thinking how to consume the rest, whereas a lot of people will scrimp and save to make mortgage repayments, even on a house that's larger and more expensive than they need.

So either people are indeed too dumb, or our society is just wired wrong, for most to do well out of stock investments, or probably any liquid investment.
Browser
Posts: 4857
Joined: Wed Sep 05, 2012 4:54 pm

Re: "Investors, How Dumb Are You?"

Post by Browser »

It used to be easier just to buy and hold and stay the course forever. There were few investment choices, and it was a pain in the whattsis to make changes once you had things set up. You got a paper statement maybe annually so you couldn't watch every twitch. Nowadays you can follow your portfolio minute-by-minute on your smartphone and buy and sell with a keypress. Maybe we need to go back to future. Bogleheads are really archaic investors; you could have been a Boglehead in the stone age. How many investment schools of thought can say that?
We don't know where we are, or where we're going -- but we're making good time.
IlliniDave
Posts: 2388
Joined: Fri May 17, 2013 7:09 am

Re: "Investors, How Dumb Are You?"

Post by IlliniDave »

According to Fidelity I've received 10.78% annualized over ~25-26 years. Not quite the same time frame, but I guess that means I'm .22% dumb? :D
Don't do something. Just stand there!
User avatar
abuss368
Posts: 27850
Joined: Mon Aug 03, 2009 2:33 pm
Location: Where the water is warm, the drinks are cold, and I don't know the names of the players!
Contact:

Re: "Investors, How Dumb Are You?"

Post by abuss368 »

Articles like this always amaze me. Really proves most investors are their own worst enemy.

Thank you for sharing Taylor.
John C. Bogle: “Simplicity is the master key to financial success."
User avatar
Aptenodytes
Posts: 3786
Joined: Tue Feb 08, 2011 7:39 pm

Re: "Investors, How Dumb Are You?"

Post by Aptenodytes »

IlliniDave wrote:According to Fidelity I've received 10.78% annualized over ~25-26 years. Not quite the same time frame, but I guess that means I'm .22% dumb? :D
That return over that time period over an entire portfolio -- not dumb but a rare combination of reckless and lucky.
hiddensee
Posts: 419
Joined: Fri Feb 07, 2014 3:17 am

Re: "Investors, How Dumb Are You?"

Post by hiddensee »

Browser wrote:It used to be easier just to buy and hold and stay the course forever. There were few investment choices, and it was a pain in the whattsis to make changes once you had things set up. You got a paper statement maybe annually so you couldn't watch every twitch. Nowadays you can follow your portfolio minute-by-minute on your smartphone and buy and sell with a keypress. Maybe we need to go back to future. Bogleheads are really archaic investors; you could have been a Boglehead in the stone age. How many investment schools of thought can say that?
On the other hand, poor fund selection, high brokerage and management fees, and limited information about investment generally. It's not really even obvious that index investing beats active investing unless you have the statistics at your fingertips. It's likely that even most buy and hold investors at that time were, at least to some extent, also stock pickers.
User avatar
baw703916
Posts: 6681
Joined: Sun Apr 01, 2007 1:10 pm
Location: Seattle

Re: "Investors, How Dumb Are You?"

Post by baw703916 »

bschultheis wrote: there is no question the average investor is prone to making wrong decisions at wrong time.
So what is the average investor doing right this minute? I want to take the other side of that trade! :D
Most of my posts assume no behavioral errors.
Leeraar
Posts: 4109
Joined: Tue Dec 10, 2013 7:41 pm
Location: Nowhere

Re: "Investors, How Dumb Are You?"

Post by Leeraar »

baw703916 wrote:
bschultheis wrote: there is no question the average investor is prone to making wrong decisions at wrong time.
So what is the average investor doing right this minute? I want to take the other side of that trade! :D
Well of course, if you know what people are doing wrong, it must be easy to do it right:

The prevailing wisdom to "buy and hold" is a noble lie—
an untruth told to investors to keep them from hurting themselves


Dear Investor,
You've heard it a thousand times. Perhaps you've even believed it—the idea that the key to long-term success is "buy and hold." Investors are consistently told to set fixed allocations for security types, dollar-cost average with periodic purchases, and—above all—stay the course. For many people, it's good advice.

It's also a noble lie.

We know that individual investors, in aggregate, are perverse market-timers—selling low and buying high. If investors can manage this feat of reverse market-timing, though, shouldn't they be able to do the opposite as well?

Either the market actually is predictable or individual investors are not reverse market-timers. Which is it?

Eugene Fama and Robert Shiller shared this year's Nobel Prize in Economics in part for showing that, as it turns out, returns are predictable over long horizons. They found that when valuations are low, expected returns are high, and vice versa. So perhaps the market can be timed.

Be the first to read Sam's commentary by subscribing to Morningstar ETFInvestor. Try us out, risk free. Order now.

This isn't a recent idea. Fama and other researchers discovered return predictability back in the 1980s. Even with this knowledge, however, the advice hasn't changed.

So why do experts urge investors to stay the course, even though there's good evidence that valuation can predict long-term returns? I can think of three reasons.

Perhaps they fear that giving investors leeway will lead to more buying high and selling low. "Stay the course" is easier to remember and implement than "buy when there's blood in the streets, even if the blood is your own."
There's very little statistical evidence that managers have been able to exploit market predictability, and this has been misinterpreted to mean that no one can time the market. All it really means, however, is that it's devilishly hard to prove given our existing tools and data.
The level of predictability is fairly low for the stock market. The cyclically adjusted price/earnings ratio, or Shiller P/E—one of the best valuation signals—provides only a ballpark range of returns over the next five to 10 years. We plotted out 10-year forward real returns for the S&P 500 versus its starting cyclically adjusted earnings yield (the inverse of Shiller P/E), using data from 1926 to 2013, and found the relationship to be very noisy—less than ideal for forecasting, except at the extremes.
The bottom line? Yes, Virginia, you can time the market—if you know what to look for.

Perhaps even more important, though, is the idea that you can question conventional wisdom. It's something we do every day at Morningstar ETFInvestor as we discover new opportunities for long-term growth.

Subscribe now to Morningstar ETFInvestor and this is the type of thought-provoking discussion you'll participate in each month. We won't promise to help you get rich quickly. Instead, we'll help you uncover real prospects backed by rigorous research and thoughtful analysis. What's more, our guidance focuses on exchange-traded funds, as they offer exciting, income-producing global opportunities that weren't available just a few years ago.

Morningstar's expert team of 150 stock, bond, and fund analysts continually seeks discounted assets with improving fundamentals and shares everything they've learned along the way. When we make a call, we're not just placing bets. We have real money—sizable investments by Morningstar and me—at work in two distinct ETF portfolios. So we have our own skin in the game.

In the investing world, nothing is certain—including sacred cows like "buy and hold." But if you're willing to do the work, there are rich opportunities out there. And I'll be here to help you question the status quo.
Best regards,
Sam Lee

Samuel Lee
ETF Strategist
Editor, Morningstar ETFInvestor
Go for it! :P

L.
You can get what you want, or you can just get old. (Billy Joel, "Vienna")
User avatar
baw703916
Posts: 6681
Joined: Sun Apr 01, 2007 1:10 pm
Location: Seattle

Re: "Investors, How Dumb Are You?"

Post by baw703916 »

I'm pretty sure the average investor is not staying the course! :P

That column is a bunch of mumbo jumbo that doesn't say much of anything though.
Most of my posts assume no behavioral errors.
Browser
Posts: 4857
Joined: Wed Sep 05, 2012 4:54 pm

Re: "Investors, How Dumb Are You?"

Post by Browser »

Buy and Hold Index investors should thank their lucky stars that there are active traders. As William Sharpe explains if all investors passively held index funds the shares of such funds would be bid up. Active management provides a social service that benefits passive index investors. So, shuddup already and let the active investors do their thing.
We don't know where we are, or where we're going -- but we're making good time.
Post Reply