Investors lag S&P 500 over past 15 years

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eskouster
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Investors lag S&P 500 over past 15 years

Post by eskouster » Sat Mar 09, 2013 7:19 pm

Not earth-shattering, but a great chart showing how much actual investors have trailed the S&P 500:

http://www.nytimes.com/interactive/2013 ... g-Low.html
Dalbar performs an annual survey of actual investor returns in mutual funds, and compares them to the return of the overall market. He shared the latest, still unpublished figures with me. They tell a sorry story.

Over the last 20 years through December, the average return of all investors in United States stock mutual funds was 4.25 percent, annualized. Over the same period, the benchmark Standard & Poor’s 500-stock index returned an annualized 8.21 percent. That’s a huge gap — nearly four percentage points a year over two decades.
http://www.nytimes.com/2013/03/10/your- ... rsify.html

FedGuy
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Re: Investors lag S&P 500 over past 15 years

Post by FedGuy » Sat Mar 09, 2013 7:55 pm

My favorite part was when the article told us that 8 minus 4 is 4.

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Re: Investors lag S&P 500 over past 15 years

Post by livesoft » Sat Mar 09, 2013 7:56 pm

Thank goodness that folks here are not average investors. The annual "What was your return?" thread shows that we are exceptional, non-emotional investors who beat a mix of bonds+S&P500 year-in/year-out.
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Re: Investors lag S&P 500 over past 15 years

Post by jeffyscott » Sat Mar 09, 2013 10:59 pm

Dalbar uses a flawed methodology.

http://www.kitces.com/blog/archives/406 ... -Post.html

To its credit, the latest DALBAR study also shows investor returns of a dollar cost averaging investor. If an investor invested a fixed amount in equity funds every year, the investor return would have been 3.17% a year for 20 years, compared to the actual investor return of 3.49% a year. The average investor beat dollar cost averaging! Why isn't that the headline?
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Re: Investors lag S&P 500 over past 15 years

Post by zaboomafoozarg » Sat Mar 09, 2013 11:51 pm

FedGuy wrote:My favorite part was when the article told us that 8 minus 4 is 4.
More specifically, 8.21 - 4.25 ~= 4

Oooh, the math :mrgreen:

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Re: Investors lag S&P 500 over past 15 years

Post by crowd79 » Sun Mar 10, 2013 2:27 am

Boglehead or not, it's pretty near impossible for one's portfolio to beat the S&P 500 due to diversification across several asset classes...

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Re: Investors lag S&P 500 over past 15 years

Post by richard » Sun Mar 10, 2013 5:25 am

If investors in mutual funds are underperforming the market, who is outperforming? On average, all investors do no underperform or outperform the market (other than in Lake Wobegon), they are the market. If one large group (mutual fund investors) are below average, others must be above average.

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Re: Investors lag S&P 500 over past 15 years

Post by Aptenodytes » Sun Mar 10, 2013 6:47 am

richard wrote:If investors in mutual funds are underperforming the market, who is outperforming? On average, all investors do not underperform or outperform the market (other than in Lake Wobegon), they are the market. If one large group (mutual fund investors) are below average, others must be above average.
You are mixing up two different uses of the word "average" here. When you say that all investors on average underperform the market, you are using average to refer to the sum of all returns divided by the number of all investors. "Average" in this case refers to investors. You seem to be thinking of the S&P 500 as also representing a kind of average, perhaps along the lines of the Dow Jones Industrial Average. In this case the S&P 500 represents a price-weighted average of the stock prices of large firms.

Although it is mathematically necessary that some investors have to end up above average relative to other investors [ruling out the practically impossible case of all investors having the exact same return], there is no mathematically necessary relationship between the investor average and the S&P 500. It is mathematically possibly for 100% of the investors to end up with returns lower than the S&P 500. The opposite is also true, but only if the investors overweight parts of the market with higher returns (e.g. small value). In practice there are many more ways to underperform than overperform.

In practice, investors as a group underperform the market benchmarks because they trade too much and they trade at the wrong time (buy high, sell low).

Mutual fund investors are not "the market" by any means. They are people who think they are smarter than the market when the opposite is the case.

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Re: Investors lag S&P 500 over past 15 years

Post by richard » Sun Mar 10, 2013 7:48 am

Aptenodytes wrote:
richard wrote:If investors in mutual funds are underperforming the market, who is outperforming? On average, all investors do not underperform or outperform the market (other than in Lake Wobegon), they are the market. If one large group (mutual fund investors) are below average, others must be above average.
You are mixing up two different uses of the word "average" here. When you say that all investors on average underperform the market, you are using average to refer to the sum of all returns divided by the number of all investors. "Average" in this case refers to investors. You seem to be thinking of the S&P 500 as also representing a kind of average, perhaps along the lines of the Dow Jones Industrial Average. In this case the S&P 500 represents a price-weighted average of the stock prices of large firms.

Although it is mathematically necessary that some investors have to end up above average relative to other investors [ruling out the practically impossible case of all investors having the exact same return], there is no mathematically necessary relationship between the investor average and the S&P 500. It is mathematically possibly for 100% of the investors to end up with returns lower than the S&P 500. The opposite is also true, but only if the investors overweight parts of the market with higher returns (e.g. small value). In practice there are many more ways to underperform than overperform.

In practice, investors as a group underperform the market benchmarks because they trade too much and they trade at the wrong time (buy high, sell low).

Mutual fund investors are not "the market" by any means. They are people who think they are smarter than the market when the opposite is the case.
The S&P is the universe for these purposes. The S&P 500 is very close to the total stock market (the spread is a small fraction of 4%). The S&P 500 is cap weighted, not price weighted.

All investors in the S&P, on average, get the S&P return (less expenses), provided you're measuring in a sensible way. Mutual fund investors are a subset of all investors. If one group is below average, another group must be above.

You claim that all investors, as a group, don't get the market return (less expenses), due to excessive trading and market timing. Excessive trading is an issue, but total expenses are nowhere near the claimed 4% underperformance. Market timing is a zero sum game. All investors as a group can't underperform due to market timing. Each trade has a buyer and a seller. In terms of market timing, one loses, the other wins, each by the same amount.

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Re: Investors lag S&P 500 over past 15 years

Post by EDN » Sun Mar 10, 2013 8:36 am

I often see these two concepts confused:

YES, the average actively managed fund must underperform the market net of fees because they are a realatively static representative sample of the market and therefore cannot outperform themselves.

NO, the average investor does not earn the net of fee return of the stock market, as stocks are one of many financial assets they hold (along with bonds, cash, etc.) in varying percentages over time. The percentages of stocks held usually rises and peaks during bull markets and bottoms during bear market troughs. And even though prices clear at each point, it's not due to an equal number of participants on each end, it's that prices move to a point where an equal amount of dollars changes hands on each end. In March 2009, if there is 1 buyer and 3 sellers, prices fall to the point where all 4 market orders are met.

The article itself indicates this, as Schwab, TRowe Price and Vanguard all report a lower equity weighting today across their firm than before the decline.

I agree these DALBAR studies showing dollar cost averaging performance do not precisely calculate investor vs investment results, and dollar weighted returns aren't perfect either because they are unable to "follow" each dollar to calculate the return on where it came from and where it went to.

Fortunately, this is one of those "if a tree falls in the woods" type questions/thought exercises. We know investors tend to behave badly, changing allocations, chasing performance, etc. We need not have precise measures of the impact to respect it's reality.

Eric

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Re: Investors lag S&P 500 over past 15 years

Post by ResNullius » Sun Mar 10, 2013 9:09 am

Financial porn, and not really good at that.

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Re: Investors lag S&P 500 over past 15 years

Post by richard » Sun Mar 10, 2013 9:18 am

EDN wrote:NO, the average investor does not earn the net of fee return of the stock market, as stocks are one of many financial assets they hold (along with bonds, cash, etc.) in varying percentages over time. The percentages of stocks held usually rises and peaks during bull markets and bottoms during bear market troughs.
Of course the average investor can underperform the market. However, all investors can't underperform the market (by more than expenses).

Consider ten investors, nine have returns of $1 and the tenth has a return of $10. The average investor has a return of $1. The average return (the market return, after expenses) is $1.90. The average investor has substantially underperformed the market. However, that can only be the case due to the outperforming investor (again, subject to expenses).

The question is, if the a substantial group is underperforming the market, what group is outperforming the market? Everyone can't underperform. Alternatively, is it plausible that mutual fund expenses total 4% per year?

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Re: Investors lag S&P 500 over past 15 years

Post by EDN » Sun Mar 10, 2013 10:12 am

richard wrote:
EDN wrote:NO, the average investor does not earn the net of fee return of the stock market, as stocks are one of many financial assets they hold (along with bonds, cash, etc.) in varying percentages over time. The percentages of stocks held usually rises and peaks during bull markets and bottoms during bear market troughs.
Of course the average investor can underperform the market. However, all investors can't underperform the market (by more than expenses).

Consider ten investors, nine have returns of $1 and the tenth has a return of $10. The average investor has a return of $1. The average return (the market return, after expenses) is $1.90. The average investor has substantially underperformed the market. However, that can only be the case due to the outperforming investor (again, subject to expenses).

The question is, if the a substantial group is underperforming the market, what group is outperforming the market? Everyone can't underperform. Alternatively, is it plausible that mutual fund expenses total 4% per year?
Richard,

You are still thinking that all money in the stock market stays there permanently and therefore only frictions reduce returns. No, the actual investor return is the time-weighted result they earn across their average stocks/bonds/cash holdings. In 2007, you could have several investors selling some cash/bonds to buy stocks at high prices/high yields, with another investor selling some stocks to buy cash/bonds. In 2008 and 2009, you could have those same stock buyers selling some stocks at much lower prices to buy cash/bonds at much lower yields, and the stock seller to sell cash/bonds at lower yields to buy more stocks. Finally, today, you could have these investors who sold some stocks in 2008/2009 selling cash/bonds to finally restore their stock allocation, with former stock buyer rebalancing again back to bonds/cash. In the former case, the investors earn less than the return on stocks and bonds, while the later simply earns the market returns on stocks/bonds plus some small diversification return from rebalancing. So you have some investors underperform and some investors earn market returns because of the timing in/out of cash/bonds and stocks.

Who are these disciplined balanced investors? Well, I know a few. :happy Who have we sold to/bought from? Don't know who, just know that we do.

Eric

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Re: Investors lag S&P 500 over past 15 years

Post by jeffyscott » Sun Mar 10, 2013 2:58 pm

EDN wrote:I agree these DALBAR studies showing dollar cost averaging performance do not precisely calculate investor vs investment results...
They calculate nothing that is of any value to anyone. At one time they claimed to have found the average fund investor earned a cumulative return of just 141% from 1984 through 2000, a period when Standard and Poor's 500-stock index returned 1,201%...that's 11% per annum underperformance.

http://www.bogleheads.org/forum/viewtop ... 10&t=39513

In that same era "Buy High, Sell Low: Timing Errors in Mutual Fund Allocations" in the Fall 1995 issue of The Journal of Portfolio Management found investors lost about 80 basis points annually due purely to bad timing. So less than 1% vs. Dalbar's claim of 11%.

http://thewealthsteward.com/2011/04/doe ... r-returns/
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Re: Investors lag S&P 500 over past 15 years

Post by Aptenodytes » Sun Mar 10, 2013 3:10 pm

If I read the graphic right these are 20-year averages they are reporting, so there's lots of room for people coming in and out of the market for long stretches. I don't think we are comparing within a fixed sample of people here.

Anyway, I've seen these kinds of results reported over and over and they never seemed odd to me. They are what I would expect to see.

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Re: Investors lag S&P 500 over past 15 years

Post by Rick Ferri » Sun Mar 10, 2013 3:20 pm

Yeah, we all know DALBAR methodology has some flaws. But the direction is right. Morningstar has "investor return" data for each asset class. Some fair better than others, but overall investors perform about 1.5% below the funds they invest in. Some of this is bad timing and other is natural cash flows into and out of the market.

Where does this negative investor return go?

It feeds the traders, brokers and advisers on Wall Street. Hey, those folks eat too, you know! :greedy

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Re: Investors lag S&P 500 over past 15 years

Post by Ed 2 » Sun Mar 10, 2013 3:29 pm

Rick Ferri wrote:Yeah, we all know DALBAR methodology has some flaws. But the direct is right. Morningstar has "investor return" data for each asset class. Some fair better than others, but overall investors perform about 1.5% below the funds they invest in. Some of this is bad timing and other is natural cash flows into and out of the market.

Where does this negative investor return go?

It feeds the traders, brokers and advisers on Wall Street. Hey, those folks eat too, you know! :greedy

Rick Ferri
agree, here some example of their 'good work....' " DALBAR Announces Service Awards for 2000 Putnam Wins Top Award in Every Category." http://www.thefreelibrary.com/DALBAR+An ... a069251597 and we know how Putnam and Janus fund company's were investigated after http://wealthmanagement.com/news/putnam ... -any-money
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Re: Investors lag S&P 500 over past 15 years

Post by Rick Ferri » Sun Mar 10, 2013 4:54 pm

The DALBAR Quantitative Analysis of Investor Behavior (QAIB) study was origanlly funded my Merrill Lynch in the mid-1990s. The purpose was to show that investors who bought commission load mutual fund purchased through financial advisers performed better than investors who bought no-load funds. Their reasoning was the "advisers" were better at keeping clients invested while do-it-yourself no-load investors were skittish and sold quickly. And that's what the original study said - just barely. It also showed that ALL fund investors are bad at timing markets, even those of advisers. So that part of the study backfired. BUT, given the press behind the study, DALBAR switched hats and become a good public servant by continuing to publish QAIB with all it's flaws.

Rick Ferri

PS. If there was a Trivial Pursuit game focused on meaningless mutual fund trivia, I would be unstoppable!
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Re: Investors lag S&P 500 over past 15 years

Post by jeffyscott » Sun Mar 10, 2013 5:14 pm

I think I'll become a "good public servant" too. I will generate random negative numbers, say, between -1 and -10 and say that is the amount by which investors under-performed the market over the last random number of years, according to my study.

I just completed my first such study and have determined that individual investors under-performed the stock market by 3.2% over the last 29 years.
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Re: Investors lag S&P 500 over past 15 years

Post by richard » Sun Mar 10, 2013 5:27 pm

EDN wrote:You are still thinking that all money in the stock market stays there permanently and therefore only frictions reduce returns. No, the actual investor return is the time-weighted result they earn across their average stocks/bonds/cash holdings. In 2007, you could have several investors selling some cash/bonds to buy stocks at high prices/high yields, with another investor selling some stocks to buy cash/bonds.
Eric, how can investor A sell a share of stock without investor B buying a share of stock? Investor A can spend the proceeds however she wants, but the share of stock remains in the market and its return counts as part of the return of the market. (There's some M&A activity, bankruptcy, new share issuance, etc., but the net effect is not large).

Remember, the original claim was "all investors in United States stock mutual funds was 4.25 percent, annualized. Over the same period, the benchmark Standard & Poor’s 500-stock index returned an annualized 8.21 percent. That’s a huge gap — nearly four percentage points a year over two decades."

If investor A loses by selling low, investor B gains by buying low. When investor C loses by buying high, investor D gains by selling high. Timing is a zero sum game.

See earlier posts and the wealth of documentation out there on problems with Dalbar's methodology.

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Re: Investors lag S&P 500 over past 15 years

Post by richard » Sun Mar 10, 2013 5:33 pm

Rick Ferri wrote:Yeah, we all know DALBAR methodology has some flaws. But the direction is right. Morningstar has "investor return" data for each asset class. Some fair better than others, but overall investors perform about 1.5% below the funds they invest in. Some of this is bad timing and other is natural cash flows into and out of the market.

Where does this negative investor return go?

It feeds the traders, brokers and advisers on Wall Street. Hey, those folks eat too, you know! :greedy

Rick Ferri
That investors underperform the market by about 1.5% is plausible, as that approximates the costs of the average fund. Dalbar's 4% is a whole lot less plausible. Bad timing losers lose to good timing winners and the net effect on all investors should be zero, other than the expenses of the Wall Street feeders. It's even possible that the bad timing losers are retail investors and the good timing winners are institutional investors, but that's distribution within the group of all investors.

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Re: Investors lag S&P 500 over past 15 years

Post by dumbmoney » Sun Mar 10, 2013 6:24 pm

richard wrote: Eric, how can investor A sell a share of stock without investor B buying a share of stock? Investor A can spend the proceeds however she wants, but the share of stock remains in the market and its return counts as part of the return of the market. (There's some M&A activity, bankruptcy, new share issuance, etc., but the net effect is not large).
There have been some studies on average public market investor return, as I recall one found 1-2% under-performance, another found no significant difference. There's no mathematical reason why the average investor can't under (or out)-perform, because money does flow into and out of the market. Think of all the money that flowed into the market in the late '90s, for example. That certainly reduced the investor return versus the index.
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Re: Investors lag S&P 500 over past 15 years

Post by Akiva » Tue Mar 12, 2013 10:18 am

eskouster wrote:Not earth-shattering, but a great chart showing how much actual investors have trailed the S&P 500:
This has been the case for as long as this performance has been tracked, but enough people don't realize it. The main driver of this outcome seems to be the disposition effect -- retail investors sell winners too quickly and hold losers too long (which puts them short the momentum factor and does other things that hurt their expected returns.)

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Re: Investors lag S&P 500 over past 15 years

Post by Akiva » Tue Mar 12, 2013 10:22 am

jeffyscott wrote:Dalbar uses a flawed methodology.
The methodology may be flawed, but academic studies that have been much more meticulous have found similarly dramatic differences between the performance of actual investors and the performance of the index. Look at any of the literature on the disposition effect.

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