Do Investors really underperform their investments

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Portfolio7
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Do Investors really underperform their investments

Post by Portfolio7 » Tue Oct 24, 2017 7:33 pm

https://www.advisorperspectives.com/art ... nvestments

Dalbar continues their annual study results publication, suggesting investors underperformed their investments by 4.7% this year.
Wade Pfau has noted errors in their methodology, early last March I believe.
Michael Edesses as well, recently in the article above. He notes his own communication with Dalbar, and mentions Pfau's work.

For my 2 cents, I have always been skeptical of the Dalbar findings, and I think Edesses is convincing. His discussion points are cogent and consistent imho. Dalbar's discussion seems geared to discussion of surface appearances regarding returns, rather than the mathematical truth behind them. Their argument seems somewhat credible only when discussing an individual investor in isolation, but not when you consider the universe of investors (or as they term it, an 'average' investor). Their response seems dismissive of the charges rather than addressing them head on and either acknowledging or disproving them, which hurts their credibility with me.

One correlary to the DALBAR findings, at least one that occurred to me, is that they would appear to validate the AUM advisor model. If you pay an advisor 1%, but your returns are ~ 4% better because you didn't make all those behavioral errors, aren't you better off by 3%? I never believed an advisor was really that useful in general, though I don't deny they can have value, especially for investors who really don't want to have to understand the investing world, or want some help staying the course.

I"m curious what forum members think.
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nisiprius
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Re: Do Investors really underperform their investments

Post by nisiprius » Tue Oct 24, 2017 7:52 pm

I'm not sure about Dalbar, but I trust Morningstar and its "investor returns" data. The pattern is not by any means uniform, and interpretation is difficult, but, by and large, yes, investor returns really do lag "fund returns"--that is to say, all of the investors in the fund collectively underperform what a buy-and-hold investor would have earned. Here's an example, Fidelity Contrafund:

http://performance.morningstar.com/fund ... ge&t=FCNTX

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Sequoia:

http://performance.morningstar.com/fund ... ge&t=SEQUX

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Oakmark:

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On the other hand, Fairholme shows only that investor returns were often very different from fund returns, but not always worse.

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Re: Do Investors really underperform their investments

Post by AlohaJoe » Tue Oct 24, 2017 8:01 pm

nisiprius wrote:
Tue Oct 24, 2017 7:52 pm
I'm not sure about Dalbar, but I trust Morningstar and its "investor returns" data.
The linked article, which is really just a summary of Pfau's earlier article, talks about the problems with Morningstar's calculations as well.

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Re: Do Investors really underperform their investments

Post by nedsaid » Tue Oct 24, 2017 9:52 pm

I don't know, I suppose I am somewhere in between. I do believe investors underperform their investments though probably by not as much as the Dalbar reports say. This is due to performance chasing, investors like what is hot and what has performed well recently. What I don't know is how many investors really do this?

The financial press bashes the individual investor as ignorant and emotional but I remember that the surveys on investor behavior from Vanguard and Fidelity showed that investors pretty much stayed the course with their 401k's during the 2008-2009 financial crisis and bear market. The evidence seems to be that individual investors are not the ignorant fools as they are often portrayed. Indeed, I have seen the so-called professional investors do some pretty wild and crazy things. Just watch how often Jim Cramer's outlook on particular stocks and the market itself shift from week to week.

So let me provoke some further thinking. Do Bogleheads underperform their investments? Are we better at controlling our emotions than the average investor? Looking at the threads that pop up, I often wonder. For example, many Bogleheads have given up on TIPS and some are wondering if International diversification is needed at all. It seems we are as subject to recency bias as the less informed investor.
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Re: Do Investors really underperform their investments

Post by unclescrooge » Tue Oct 24, 2017 10:03 pm

Let's just admit it.

Eight years into a bull market we're all above average investors :mrgreen:

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Re: Do Investors really underperform their investments

Post by nedsaid » Tue Oct 24, 2017 10:15 pm

unclescrooge wrote:
Tue Oct 24, 2017 10:03 pm
Let's just admit it.

Eight years into a bull market we're all above average investors :mrgreen:
Well, I am an above average stock investor and you are an above average real estate investor. :wink:
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Re: Do Investors really underperform their investments

Post by Sandtrap » Tue Oct 24, 2017 10:35 pm

unclescrooge wrote:
Tue Oct 24, 2017 10:03 pm
Let's just admit it.

Eight years into a bull market we're all above average investors :mrgreen:
Maybe. I was a lot less nervous when I owned apartment buildings. They weren't going to vanish overnight. :shock:

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Re: Do Investors really underperform their investments

Post by alpine_boglehead » Tue Oct 24, 2017 10:45 pm

Sandtrap wrote:
Tue Oct 24, 2017 10:35 pm
unclescrooge wrote:
Tue Oct 24, 2017 10:03 pm
Let's just admit it.

Eight years into a bull market we're all above average investors :mrgreen:
Maybe. I was a lot less nervous when I owned apartment buildings. They weren't going to vanish overnight. :shock:
The companies you own via TSM aren't going to vanish overnight either, only the price other investors offer you for them does change all the time. Apartment building "value" probably also dropped a lot in 2007/2008, only you don't get continuous quotations for your buildings.

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Re: Do Investors really underperform their investments

Post by Sandtrap » Tue Oct 24, 2017 10:48 pm

alpine_boglehead wrote:
Tue Oct 24, 2017 10:45 pm
Sandtrap wrote:
Tue Oct 24, 2017 10:35 pm
unclescrooge wrote:
Tue Oct 24, 2017 10:03 pm
Let's just admit it.

Eight years into a bull market we're all above average investors :mrgreen:
Maybe. I was a lot less nervous when I owned apartment buildings. They weren't going to vanish overnight. :shock:
The companies you own via TSM aren't going to vanish overnight either, only the price other investors offer you for them does change all the time. Apartment building "value" probably also dropped a lot in 2007/2008, only you don't get continuous quotations for your buildings.
True. I just collected rent and it was "business as usual".

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Re: Do Investors really underperform their investments

Post by venkman » Tue Oct 24, 2017 11:00 pm

It is not possible that all investors underperform their investments by buying and selling at the wrong times. In fact, about half the well- or poorly-timed trades must be at the “right” time and half at the “wrong” time.

Then if – let us say – all individual investors in mutual funds in aggregate (the ones evaluated by DALBAR and Morningstar) are poor decision makers, who are the good decision makers that are always on the other side?

There is no evidence that there is such a group of consistently good decision makers. As is well known, for example, institutional investors in aggregate beat the market no more frequently than individual investors in aggregate. So this consideration alone should have been enough to cast doubt on DALBAR’s conclusions.
For me, this is the most convincing argument. One group can't underperform by 4.7% unless another group is overperforming by the same amount. And no one seems to be consistently overperforming by that much.

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Re: Do Investors really underperform their investments

Post by stlutz » Tue Oct 24, 2017 11:07 pm

The mistake that underlies this is the belief that the market going up causes investors to "pile in at the top before the market crashes."

The cause of the market going up is investors piling in, not the result. Same goes with market declines--they happen because investors as a whole are moving out.

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Re: Do Investors really underperform their investments

Post by AlohaJoe » Tue Oct 24, 2017 11:16 pm

nedsaid wrote:
Tue Oct 24, 2017 9:52 pm
I don't know, I suppose I am somewhere in between. I do believe investors underperform their investments though probably by not as much as the Dalbar reports say. This is due to performance chasing, investors like what is hot and what has performed well recently. What I don't know is how many investors really do this?
It is pretty dated but the 2005 report "The Inattentive Participant: Portfolio Trading Behavior in 401(k) Plans" looked at the actual trading patterns of 1.2 million people -- the data was a 2-year extract of data 401k plans administered by Vanguard from 2003 to 2004 -- and found
Almost all participants (80%) initiate no trades, and an additional 10% makes only a single trade, in a two-year period. Even among traders, portfolio turnover rates are one-third the rate of professional money managers.

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Re: Do Investors really underperform their investments

Post by in_reality » Tue Oct 24, 2017 11:21 pm

venkman wrote:
Tue Oct 24, 2017 11:00 pm
It is not possible that all investors underperform their investments by buying and selling at the wrong times. In fact, about half the well- or poorly-timed trades must be at the “right” time and half at the “wrong” time.

Then if – let us say – all individual investors in mutual funds in aggregate (the ones evaluated by DALBAR and Morningstar) are poor decision makers, who are the good decision makers that are always on the other side?

There is no evidence that there is such a group of consistently good decision makers. As is well known, for example, institutional investors in aggregate beat the market no more frequently than individual investors in aggregate. So this consideration alone should have been enough to cast doubt on DALBAR’s conclusions.
For me, this is the most convincing argument. One group can't underperform by 4.7% unless another group is overperforming by the same amount. And no one seems to be consistently overperforming by that much.

Isn’t DALBAR measuring mutual funds though? Doesn’t that leave another group (non-mutual fund) investors out there?

In any case, analysis I’ve seen says DALBAR’s numbers are much too high and that the actual amount mutual fund investors underperform by is decreasingly least in part due to money going into other investments (ETFs etc).

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Re: Do Investors really underperform their investments

Post by unclescrooge » Wed Oct 25, 2017 12:00 am

Sandtrap wrote:
Tue Oct 24, 2017 10:35 pm
unclescrooge wrote:
Tue Oct 24, 2017 10:03 pm
Let's just admit it.

Eight years into a bull market we're all above average investors :mrgreen:
Maybe. I was a lot less nervous when I owned apartment buildings. They weren't going to vanish overnight. :shock:
Tell that to my buddy in Houston. His apartment'd roof got blown off and between the HOA and insurance, nothing is being done. Meanwhile rain is destroying the interiors, and it's obviously vacant.

He's sworn off real estate investing.

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Re: Do Investors really underperform their investments

Post by Sandtrap » Wed Oct 25, 2017 12:37 am

unclescrooge wrote:
Wed Oct 25, 2017 12:00 am
Sandtrap wrote:
Tue Oct 24, 2017 10:35 pm
unclescrooge wrote:
Tue Oct 24, 2017 10:03 pm
Let's just admit it.

Eight years into a bull market we're all above average investors :mrgreen:
Maybe. I was a lot less nervous when I owned apartment buildings. They weren't going to vanish overnight. :shock:
Tell that to my buddy in Houston. His apartment'd roof got blown off and between the HOA and insurance, nothing is being done. Meanwhile rain is destroying the interiors, and it's obviously vacant.

He's sworn off real estate investing.
Experienced that in Hurricane Iwa. Hit the windward side of Oahu solid. Not as bad as Houston but devastating. Things happen. Tough indeed.

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Re: Do Investors really underperform their investments

Post by nedsaid » Wed Oct 25, 2017 1:08 am

AlohaJoe wrote:
Tue Oct 24, 2017 11:16 pm
nedsaid wrote:
Tue Oct 24, 2017 9:52 pm
I don't know, I suppose I am somewhere in between. I do believe investors underperform their investments though probably by not as much as the Dalbar reports say. This is due to performance chasing, investors like what is hot and what has performed well recently. What I don't know is how many investors really do this?
It is pretty dated but the 2005 report "The Inattentive Participant: Portfolio Trading Behavior in 401(k) Plans" looked at the actual trading patterns of 1.2 million people -- the data was a 2-year extract of data 401k plans administered by Vanguard from 2003 to 2004 -- and found
Almost all participants (80%) initiate no trades, and an additional 10% makes only a single trade, in a two-year period. Even among traders, portfolio turnover rates are one-third the rate of professional money managers.
This is consistent with what I have seen elsewhere, I think individual investors are smarter than what they are given credit for. Sometimes inertia is a good thing.
A fool and his money are good for business.

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Re: Do Investors really underperform their investments

Post by inbox788 » Wed Oct 25, 2017 1:37 am

unclescrooge wrote:
Tue Oct 24, 2017 10:03 pm
Let's just admit it.

Eight years into a bull market we're all above average investors :mrgreen:
I don't understand why many folks think it's only with bull markets that low cost indexing outperforms. The expense fees apply even in bear markets, and lower fees mean less losses. Active investing and hedge funds may sometimes beat index funds, but they're always suffering from the fee drag.

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Re: Do Investors really underperform their investments

Post by nisiprius » Wed Oct 25, 2017 6:40 am

AlohaJoe wrote:
Tue Oct 24, 2017 8:01 pm
nisiprius wrote:
Tue Oct 24, 2017 7:52 pm
I'm not sure about DALBAR, but I trust Morningstar and its "investor returns" data.
The linked article, which is really just a summary of Pfau's earlier article, talks about the problems with Morningstar's calculations as well.
:oops: Shame on me. However, on actually Reading The Fine Article (and it took a lot of scrolling, with strange pauses for more of the long page to load, to get past DALBAR to Morningstar.

But no, it does not talk about problems with their calculations at all; it even seems to endorse them:
Morningstar’s results do in fact show a shortfall of investor return defined by dollar-weighted return, as compared with investment return defined by time-weighted return. Where Morningstar goes too far, however, is in implying that bad investor behavior causes it.
The interpretation of "the gap" or "the lag" is indeed a problem. I've thought for a very long time that it can't be any easier to "reverse time" the market and deliberately time the market so as to underperform. If it were really true that "the public" consistently does the wrong thing, then contrarian strategies would be a simple way to outperform the market. There have been contrarian strategies for as long as I've been paying attention, and they haven't been the magic key to wealth.

Edesess says
There is a slightly different reason to blame investors for underperformance. When they panic and bail out of the stock market after a decline, they usually invest in low-yielding assets instead. This means that over time, they are less than 100% invested in the asset that has the superior long-run expected return.

This is not a critique of their “poor decision making” by getting in and out of the market at the wrong times, but of their poor decision making by getting out at all. If the stock market truly is a random walk, then you’ll maximize your expected return by being in it 100% of the time – any less than that produces a lower expected return, no matter when you get in or out.

But what if the investor doesn’t want to take the risk of being 100% in the market 100% of the time? Typical asset allocation advice doesn’t recommend that for most investors; it recommends a mix of stocks and lower-expected-return fixed income, such as a 60/40 mix. It is then assumed that the investor adheres to that mix by rebalancing periodically.

Why would it not be an equally good strategy to be 100% in the market 60% of the time, and 100% in fixed income 40% of the time? Let us suppose that this did not mean jumping back and forth constantly, but, say, staying six years 100% invested in stocks and then four years 100% invested in fixed income.
I've asked this question, non-quantitatively, for a long time. My intuition is that if you assume that the person following the strategy has no market timing ability at all--if the switches in and out of the market are completely random--what you would expect is that the return would be about the same, but that the risk as measured by standard deviation would be higher. Since you are in the stock market only 60% of the time, and you are neither in it for the right 60% of the time or the wrong 60% of the time, the main effect is that over a ten year period, you are only getting to average over six years while the steady 60/40 investor is averaging over ten.
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Re: Do Investors really underperform their investments

Post by afan » Wed Oct 25, 2017 6:43 am

Interesting that DALBAR offers a response, but never responds to the calculations. Instead, the CEO mentions a variety of issues that are unrelated to the question at hand.

This seems to reflect tacit agreement with the assertions that the DALBAR methodology is systematically misleading.
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Re: Do Investors really underperform their investments

Post by Chip » Wed Oct 25, 2017 7:12 am

It's mentioned in Pfau's article, but let's remember that it was Bogleheads member tfb (Harry Sit - The Finance Buff) who first explored the problems with Dalbar's calculations and conclusions.

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Re: Do Investors really underperform their investments

Post by unclescrooge » Wed Oct 25, 2017 7:51 am

nedsaid wrote:
Wed Oct 25, 2017 1:08 am
AlohaJoe wrote:
Tue Oct 24, 2017 11:16 pm
nedsaid wrote:
Tue Oct 24, 2017 9:52 pm
I don't know, I suppose I am somewhere in between. I do believe investors underperform their investments though probably by not as much as the Dalbar reports say. This is due to performance chasing, investors like what is hot and what has performed well recently. What I don't know is how many investors really do this?
It is pretty dated but the 2005 report "The Inattentive Participant: Portfolio Trading Behavior in 401(k) Plans" looked at the actual trading patterns of 1.2 million people -- the data was a 2-year extract of data 401k plans administered by Vanguard from 2003 to 2004 -- and found
Almost all participants (80%) initiate no trades, and an additional 10% makes only a single trade, in a two-year period. Even among traders, portfolio turnover rates are one-third the rate of professional money managers.
This is consistent with what I have seen elsewhere, I think individual investors are smarter than what they are given credit for. Sometimes inertia is a good thing.
Could the time period also impact the results? Maybe investors were still shocked from 2000, and too busy flipping houses?

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Re: Do Investors really underperform their investments

Post by unclescrooge » Wed Oct 25, 2017 8:04 am

inbox788 wrote:
Wed Oct 25, 2017 1:37 am
unclescrooge wrote:
Tue Oct 24, 2017 10:03 pm
Let's just admit it.

Eight years into a bull market we're all above average investors :mrgreen:
I don't understand why many folks think it's only with bull markets that low cost indexing outperforms. The expense fees apply even in bear markets, and lower fees mean less losses. Active investing and hedge funds may sometimes beat index funds, but they're always suffering from the fee drag.
That's quite a jump to go from above average investors to active vs.passive. I made no such claim.

But since you bought up the topic, I'm not a pure boglehead, as my slice and dice portfolio contains over a dozen funds, I have a tactical sleeve, and my largest allocation to U.S. Large Cap stocks has a fee of 0.49%. And that's by choice.

But this high-cost active index fund has outperformed your low cost index fund over the past decade.

Low cost is generally good, but it isn't everything.
When you look at everything through that lens, you sometimes throw away the good stuff.

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Re: Do Investors really underperform their investments

Post by Random Walker » Wed Oct 25, 2017 8:07 am

I don’t know whether investors on average underperform the funds they invest in. But I do believe that one potential advantage that us individual investors have is potential to stick to a plan with a long term view. We are not beholden to quarterly comparison to a board or an index.

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Re: Do Investors really underperform their investments

Post by goblue100 » Wed Oct 25, 2017 8:33 am

I'm no numbers expert, but wouldn't a lot of investors do worse than the funds reported return simply due to DCA'ing into the fund, either through payroll deductions or automatic bank withdrawals? I suspect Contrafund, for example, has a large 401k investor base.
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Re: Do Investors really underperform their investments

Post by afan » Wed Oct 25, 2017 8:54 am

Yes, that is one of the major flaws with the analysis that ignores the timing of cash flows.
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Re: Do Investors really underperform their investments

Post by asif408 » Wed Oct 25, 2017 9:41 am

nedsaid wrote:
Tue Oct 24, 2017 9:52 pm
So let me provoke some further thinking. Do Bogleheads underperform their investments? Are we better at controlling our emotions than the average investor? Looking at the threads that pop up, I often wonder. For example, many Bogleheads have given up on TIPS and some are wondering if International diversification is needed at all. It seems we are as subject to recency bias as the less informed investor.
I think the more seasoned Bogleheads probably do a better job at the emotional control aspects and probably don't underperform their investments, but they are also older, more educated, and have more investing experience. But on average I don't see any evidence that the average posters on here are any better at controlling their emotions or avoid chasing performance than anyone that doesn't post here, such as family and friends I talk to. I actually use these forums to give me a temperature reading on fads and fashions, because I don't see the members of this forum on average as being much different than what I see outside of it when it comes to the investing fads and fashions of the day.

As you mentioned, there has been a lot of negativity surrounding international stocks here the last few years. I've also see it outside of this forums, among family members who have investments at several brokers. They've shared their allocations with me and they all have heavy US allocations to stocks and very little in international stocks. These observations along with a few other indicators convinced me last year it was a good time to shift more heavily to international stocks in my portfolio. I think it was in an interview with Howards Marks that he said something to the effect of sometimes the news can't be that good, but there are also times when the news can't be that bad. Yes, international stocks have underperformed US stocks since the mid 1990s. But if you look at the previous 20 years you see the opposite, with international outperforming US. So recency bias among Bogleheads is prevalent. And if you truly belief the long-term performance between US and intenational is a coin flip, I don't see why you wouldn't think international would not catch up again at some point. Maybe you don't have 100% international stock allocation, but 0% in international for US investors seems just as crazy.

Similarly, precious metals equities (PME) were universally unloved between 2011 and 2015 after their 70%+ fall. Of course, before 2011 it was the golden boy for a good 10 year stretch. I remember hearing a Morningstar interview in late 2015 with one of the hosts saying their session on precious metals equities was one of the smallest ever. Right after that interview PME went up over 100% in 6 months. After those first 6 months you began seeing posts about adding PME to a portfolio. Then they fell 30% and its pretty much been been crickets since then.

So I think when you combine a lot of these observations about human behavior in the investing world you see that even the most astute and educated investors are not averse to fads and fashions. It's a minority that have the combination of an understanding of financial history and emotional control to invest successfully and not underperform the investments held.

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Re: Do Investors really underperform their investments

Post by nedsaid » Wed Oct 25, 2017 12:11 pm

asif408 wrote:
Wed Oct 25, 2017 9:41 am
nedsaid wrote:
Tue Oct 24, 2017 9:52 pm
So let me provoke some further thinking. Do Bogleheads underperform their investments? Are we better at controlling our emotions than the average investor? Looking at the threads that pop up, I often wonder. For example, many Bogleheads have given up on TIPS and some are wondering if International diversification is needed at all. It seems we are as subject to recency bias as the less informed investor.
I think the more seasoned Bogleheads probably do a better job at the emotional control aspects and probably don't underperform their investments, but they are also older, more educated, and have more investing experience. But on average I don't see any evidence that the average posters on here are any better at controlling their emotions or avoid chasing performance than anyone that doesn't post here, such as family and friends I talk to. I actually use these forums to give me a temperature reading on fads and fashions, because I don't see the members of this forum on average as being much different than what I see outside of it when it comes to the investing fads and fashions of the day.

As you mentioned, there has been a lot of negativity surrounding international stocks here the last few years. I've also see it outside of this forums, among family members who have investments at several brokers. They've shared their allocations with me and they all have heavy US allocations to stocks and very little in international stocks. These observations along with a few other indicators convinced me last year it was a good time to shift more heavily to international stocks in my portfolio. I think it was in an interview with Howards Marks that he said something to the effect of sometimes the news can't be that good, but there are also times when the news can't be that bad. Yes, international stocks have underperformed US stocks since the mid 1990s. But if you look at the previous 20 years you see the opposite, with international outperforming US. So recency bias among Bogleheads is prevalent. And if you truly belief the long-term performance between US and intenational is a coin flip, I don't see why you wouldn't think international would not catch up again at some point. Maybe you don't have 100% international stock allocation, but 0% in international for US investors seems just as crazy.

Similarly, precious metals equities (PME) were universally unloved between 2011 and 2015 after their 70%+ fall. Of course, before 2011 it was the golden boy for a good 10 year stretch. I remember hearing a Morningstar interview in late 2015 with one of the hosts saying their session on precious metals equities was one of the smallest ever. Right after that interview PME went up over 100% in 6 months. After those first 6 months you began seeing posts about adding PME to a portfolio. Then they fell 30% and its pretty much been been crickets since then.

So I think when you combine a lot of these observations about human behavior in the investing world you see that even the most astute and educated investors are not averse to fads and fashions. It's a minority that have the combination of an understanding of financial history and emotional control to invest successfully and not underperform the investments held.
Great post, thanks for your response. I think the Bogleheads as a group are better investors than the average individual investor but they certainly are not perfect.

As far as precious metals funds, I have taken a good hard look but didn't buy in because of their poor long term records. I see them more as portfolio insurance, I didn't want to pay the premium.
A fool and his money are good for business.

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Re: Do Investors really underperform their investments

Post by asif408 » Wed Oct 25, 2017 12:46 pm

nedsaid wrote:
Wed Oct 25, 2017 12:11 pm
As far as precious metals funds, I have taken a good hard look but didn't buy in because of their poor long term records. I see them more as portfolio insurance, I didn't want to pay the premium.
Definitely agree they aren't necessary, but I find it funny when posts start to pop up about adding to a position in an asset class that was previously ignored after strong recent performance. I was looking at some of the older posts (say pre-2011) recently and the general consensus was much less negative to foreign stocks, probably because of their outperformance in the mid 2000s. I'll be curious to watch and see if there is a transition among the mood of posters here if foreign stocks continue their recent outperformance for several years.

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Re: Do Investors really underperform their investments

Post by 2015 » Wed Oct 25, 2017 2:02 pm

unclescrooge wrote:
Wed Oct 25, 2017 12:00 am
Sandtrap wrote:
Tue Oct 24, 2017 10:35 pm
unclescrooge wrote:
Tue Oct 24, 2017 10:03 pm
Let's just admit it.

Eight years into a bull market we're all above average investors :mrgreen:
Maybe. I was a lot less nervous when I owned apartment buildings. They weren't going to vanish overnight. :shock:
Tell that to my buddy in Houston. His apartment'd roof got blown off and between the HOA and insurance, nothing is being done. Meanwhile rain is destroying the interiors, and it's obviously vacant.

He's sworn off real estate investing.
A friend and fellow investors sold their Houston apartment building only a few months before it was severely damaged in the floods. He was one of the lucky ones, the buyer(s), not so lucky.

avalpert
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Re: Do Investors really underperform their investments

Post by avalpert » Wed Oct 25, 2017 3:58 pm

asif408 wrote:
Wed Oct 25, 2017 12:46 pm
nedsaid wrote:
Wed Oct 25, 2017 12:11 pm
As far as precious metals funds, I have taken a good hard look but didn't buy in because of their poor long term records. I see them more as portfolio insurance, I didn't want to pay the premium.
Definitely agree they aren't necessary, but I find it funny when posts start to pop up about adding to a position in an asset class that was previously ignored after strong recent performance. I was looking at some of the older posts (say pre-2011) recently and the general consensus was much less negative to foreign stocks, probably because of their outperformance in the mid 2000s. I'll be curious to watch and see if there is a transition among the mood of posters here if foreign stocks continue their recent outperformance for several years.
There is no question that performance chasing and recency bias (among many others) are on full display on this forum all the time. I don't know that the average poster here is better than the average investor - I think they are more engaged then the average investor but that is at least as likely to lead them to do things that have worse outcomes than the average investor as it is to lead to better outcomes.

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Sandtrap
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Re: Do Investors really underperform their investments

Post by Sandtrap » Wed Oct 25, 2017 4:00 pm

avalpert wrote:
Wed Oct 25, 2017 3:58 pm
asif408 wrote:
Wed Oct 25, 2017 12:46 pm
nedsaid wrote:
Wed Oct 25, 2017 12:11 pm
As far as precious metals funds, I have taken a good hard look but didn't buy in because of their poor long term records. I see them more as portfolio insurance, I didn't want to pay the premium.
Definitely agree they aren't necessary, but I find it funny when posts start to pop up about adding to a position in an asset class that was previously ignored after strong recent performance. I was looking at some of the older posts (say pre-2011) recently and the general consensus was much less negative to foreign stocks, probably because of their outperformance in the mid 2000s. I'll be curious to watch and see if there is a transition among the mood of posters here if foreign stocks continue their recent outperformance for several years.
There is no question that performance chasing and recency bias (among many others) are on full display on this forum all the time. I don't know that the average poster here is better than the average investor - I think they are more engaged then the average investor but that is at least as likely to lead them to do things that have worse outcomes than the average investor as it is to lead to better outcomes.
Good point. Does the "average investor" include those not residing in "Bogleheadville"?
j

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Portfolio7
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Re: Do Investors really underperform their investments

Post by Portfolio7 » Wed Oct 25, 2017 5:10 pm

Sandtrap wrote:
Wed Oct 25, 2017 4:00 pm
avalpert wrote:
Wed Oct 25, 2017 3:58 pm
asif408 wrote:
Wed Oct 25, 2017 12:46 pm
nedsaid wrote:
Wed Oct 25, 2017 12:11 pm
As far as precious metals funds, I have taken a good hard look but didn't buy in because of their poor long term records. I see them more as portfolio insurance, I didn't want to pay the premium.
Definitely agree they aren't necessary, but I find it funny when posts start to pop up about adding to a position in an asset class that was previously ignored after strong recent performance. I was looking at some of the older posts (say pre-2011) recently and the general consensus was much less negative to foreign stocks, probably because of their outperformance in the mid 2000s. I'll be curious to watch and see if there is a transition among the mood of posters here if foreign stocks continue their recent outperformance for several years.
There is no question that performance chasing and recency bias (among many others) are on full display on this forum all the time. I don't know that the average poster here is better than the average investor - I think they are more engaged then the average investor but that is at least as likely to lead them to do things that have worse outcomes than the average investor as it is to lead to better outcomes.
Good point. Does the "average investor" include those not residing in "Bogleheadville"?
j
Another upvote. I hate missing out, and 2013 still kills me, even though I know better than to expect my portfolio to hit on all cylinders. I have a significant allocation to international (and fixed income), so despite SPY being up 30%, I was up less than half of that in total. Only now is international starting to pay off.
An investment in knowledge pays the best interest.

inbox788
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Re: Do Investors really underperform their investments

Post by inbox788 » Thu Oct 26, 2017 12:49 pm

unclescrooge wrote:
Wed Oct 25, 2017 8:04 am
inbox788 wrote:
Wed Oct 25, 2017 1:37 am
unclescrooge wrote:
Tue Oct 24, 2017 10:03 pm
Let's just admit it.

Eight years into a bull market we're all above average investors :mrgreen:
I don't understand why many folks think it's only with bull markets that low cost indexing outperforms. The expense fees apply even in bear markets, and lower fees mean less losses. Active investing and hedge funds may sometimes beat index funds, but they're always suffering from the fee drag.
That's quite a jump to go from above average investors to active vs.passive. I made no such claim.

But since you bought up the topic, I'm not a pure boglehead, as my slice and dice portfolio contains over a dozen funds, I have a tactical sleeve, and my largest allocation to U.S. Large Cap stocks has a fee of 0.49%. And that's by choice.

But this high-cost active index fund has outperformed your low cost index fund over the past decade.

Low cost is generally good, but it isn't everything.
When you look at everything through that lens, you sometimes throw away the good stuff.
I took the "we" to mean BH who invest in low cost passive index funds. It is my expectation that over ANY 8 year period, with similar funds, a fund with less than 0.1% EF will outperform a fund with 1%+ fees the vast majority of the time. Which Large Cap did you wisely or fortunately pick? What percentage of your assets did you have in it? While 0.49% isn't all that high for an active fund, I'd bet against it outperforming the next 8 years.

I have thrown away some good stuff. Last year I divested away from FOCPX (up 30% vs less than 10% what the funds went into). Unlucky timing, but glad for the simplification and risk reduction.

https://fundresearch.fidelity.com/mutua ... /316389105

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Re: Do Investors really underperform their investments

Post by oldcomputerguy » Thu Oct 26, 2017 12:56 pm

Portfolio7 wrote:
Tue Oct 24, 2017 7:33 pm
One correlary to the DALBAR findings, at least one that occurred to me, is that they would appear to validate the AUM advisor model. If you pay an advisor 1%, but your returns are ~ 4% better because you didn't make all those behavioral errors, aren't you better off by 3%?
This presupposes that the advisor is immune to making the same behavioral errors.
Anybody know why there's a 20-pound frozen turkey up in the light grid?

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Re: Do Investors really underperform their investments

Post by bsteiner » Thu Oct 26, 2017 6:19 pm

I thought that all of the investors collectively owned all of the securities at all times. If that's the case, I don't understand how the investors collectively can do better or worse than the relevant markets, at least before taxes and management and transaction costs.

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Re: Do Investors really underperform their investments

Post by pkcrafter » Thu Oct 26, 2017 7:33 pm

Some studies (Odean & Barber?) show investors underperform by 1.5 -5.5% after costs. I don't find that hard to believe. I don't trust DALBARs numbers, they appear to have an incentive.

https://books.google.com/books?id=9kIzh ... an&f=false

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

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Re: Do Investors really underperform their investments

Post by inbox788 » Thu Oct 26, 2017 7:52 pm

bsteiner wrote:
Thu Oct 26, 2017 6:19 pm
I thought that all of the investors collectively owned all of the securities at all times. If that's the case, I don't understand how the investors collectively can do better or worse than the relevant markets, at least before taxes and management and transaction costs.
True. But often some asset classes (gold, commodities, private equity, derivatives, etc.) are used and not accounted for. Also, investors come and go for a variety of reasons, and their participation is poorly tracked. How does one account for dividends and stock buybacks? It's very difficult and tedious to track every transaction.

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Re: Do Investors really underperform their investments

Post by Taylor Larimore » Thu Oct 26, 2017 7:56 pm

Unclescrooge:

What is the name of your "High-cost inactive index fund has outperformed your low cost index fund over the past decade?"

Thank you and best wishes.

Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: Do Investors really underperform their investments

Post by jalbert » Thu Oct 26, 2017 7:57 pm

The investors that are purported to bail out and sell at the bottom of bear markets would lower the average return of mutual fund investors substantially in aggregate due to their contribution to the average.
Risk is not a guarantor of return.

inbox788
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Re: Do Investors really underperform their investments

Post by inbox788 » Thu Oct 26, 2017 9:00 pm

Taylor Larimore wrote:
Thu Oct 26, 2017 7:56 pm
Unclescrooge:

What is the name of your "High-cost inactive index fund has outperformed your low cost index fund over the past decade?"

Thank you and best wishes.

Taylor
I misread original as active fund not index fund. What is a inactive index fund or active index fund anyways? AFAIK, an index fund is for the most part passive, and I consider SP500 and DJIA tracking funds among them.

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unclescrooge
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Re: Do Investors really underperform their investments

Post by unclescrooge » Fri Oct 27, 2017 2:09 pm

inbox788 wrote:
Thu Oct 26, 2017 9:00 pm
Taylor Larimore wrote:
Thu Oct 26, 2017 7:56 pm
Unclescrooge:

What is the name of your "High-cost inactive index fund has outperformed your low cost index fund over the past decade?"

Thank you and best wishes.

Taylor
I misread original as active fund not index fund. What is a inactive index fund or active index fund anyways? AFAIK, an index fund is for the most part passive, and I consider SP500 and DJIA tracking funds among them.
The definition is loose.

Here's my take.

Passive index funds are market cap weighted and the index is designed to be mostly static.

Any fund that follows an index that isn't market cap weighted, and reconstitutes frequently is active index fund.

It might reconstitute once a year with a 5% turnover, or several times with an annual turnover of 100%+.

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Portfolio7
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Re: Do Investors really underperform their investments

Post by Portfolio7 » Fri Oct 27, 2017 2:54 pm

oldcomputerguy wrote:
Thu Oct 26, 2017 12:56 pm
Portfolio7 wrote:
Tue Oct 24, 2017 7:33 pm
One correlary to the DALBAR findings, at least one that occurred to me, is that they would appear to validate the AUM advisor model. If you pay an advisor 1%, but your returns are ~ 4% better because you didn't make all those behavioral errors, aren't you better off by 3%?
This presupposes that the advisor is immune to making the same behavioral errors.
Yes, very good point. I've wondered if one could ever justify the fees of an AUM model, and this is the best I've run across, but you're 100% right about the advisor.
An investment in knowledge pays the best interest.

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Portfolio7
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Re: Do Investors really underperform their investments

Post by Portfolio7 » Fri Oct 27, 2017 2:56 pm

Chip wrote:
Wed Oct 25, 2017 7:12 am
It's mentioned in Pfau's article, but let's remember that it was Bogleheads member tfb (Harry Sit - The Finance Buff) who first explored the problems with Dalbar's calculations and conclusions.
Chip, I wanted to thank you for this :beer :beer :beer ; I hadn't realized.
An investment in knowledge pays the best interest.

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Re: Do Investors really underperform their investments

Post by dumbmoney » Sat Oct 28, 2017 1:34 pm

bsteiner wrote:
Thu Oct 26, 2017 6:19 pm
I thought that all of the investors collectively owned all of the securities at all times. If that's the case, I don't understand how the investors collectively can do better or worse than the relevant markets, at least before taxes and management and transaction costs.
The set of securities isn't static. Money flows in (e.g. IPOs, bond issues) and out (e.g. private equity, bond maturity). So, there definitely will be a difference between index return and the collective security return.
I am pleased to report that the invisible forces of destruction have been unmasked, marking a turning point chapter when the fraudulent and speculative winds are cast into the inferno of extinction.

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Re: Do Investors really underperform their investments

Post by nisiprius » Sat Oct 28, 2017 3:48 pm

bsteiner wrote:
Thu Oct 26, 2017 6:19 pm
I thought that all of the investors collectively owned all of the securities at all times. If that's the case, I don't understand how the investors collectively can do better or worse than the relevant markets, at least before taxes and management and transaction costs.
Investment companies (including both mutual funds and ETFs) collectively hold 31% of corporate equity, so mutual fund and ETF investors could do worse than the rest of the market. Or that there are a relatively small number of brilliant geniuses--or successful exploiters of legal but asymmetrical information--or even successful exploiters who are using information and getting away with it... anyway, a few people who are profiting at the expense of the rest of the market. And that those few people are to be found outside the group of "mutual fund and ETF investors."

I'm not saying this is really happening, I'm saying that it is logically and mathematically possible.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

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Re: Do Investors really underperform their investments

Post by tfb » Sat Oct 28, 2017 4:54 pm

Chip wrote:
Wed Oct 25, 2017 7:12 am
It's mentioned in Pfau's article, but let's remember that it was Bogleheads member tfb (Harry Sit - The Finance Buff) who first explored the problems with Dalbar's calculations and conclusions.
As much as I'd like to take the credit, the problem Wade Pfau found more recently was much bigger than the problem I found before. I thought the problem was due to uneven distribution of returns (good returns in the first decade, poor returns in the second decade). Wade Pfau found investors would show a poor return under the DALBAR methodology no matter what.
Harry Sit, taking a break from the forums.

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