Investors got it wrong again in October

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Investors got it wrong again in October

Post by larryswedroe » Mon Nov 14, 2011 12:03 pm

Thought you might find this of interest

http://www.cbsnews.com/8301-505123_162- ... ncol;lst;1

Best wishes
Larry

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bob90245
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Re: Investors got it wrong again in October

Post by bob90245 » Mon Nov 14, 2011 12:10 pm

Larry Swedroe wrote:Investors withdrew almost $18 billion from the market in October, marking the sixth straight month of withdrawals seemingly in response to the market dip we experienced from May through September. It was bad timing, as the S&P 500 Index returned almost 11 percent in October, more than the annualized return the market has provided over the long term.
Which begs the question. All stocks have to be owned by someone. If $18 billion are being sold, who is on the other side of the trade buying $18 billion?
Ignore the market noise. Keep to your rebalancing schedule whether that is semi-annual, annual or trigger bands.

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Re: Investors got it wrong again in October

Post by yobria » Mon Nov 14, 2011 12:24 pm

bob90245 wrote:
Larry Swedroe wrote:Investors withdrew almost $18 billion from the market in October, marking the sixth straight month of withdrawals seemingly in response to the market dip we experienced from May through September. It was bad timing, as the S&P 500 Index returned almost 11 percent in October, more than the annualized return the market has provided over the long term.
Which begs the question. All stocks have to be owned by someone. If $18 billion are being sold, who is on the other side of the trade buying $18 billion?
That number is only for traditional mutual funds. From the link in the article:
Exchange-traded funds: Investors deposited a net $19 billion into ETFs, which bundle together investments in a particular market index. Unlike mutual funds, they can be traded during daily sessions just like stocks
Nick

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Re: Investors got it wrong again in October

Post by AndroAsc » Mon Nov 14, 2011 12:27 pm

Should have bought more in Sept when I rebalanced... oh well I was almost dry out of cash during that time.

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Re: Investors got it wrong again in October

Post by bob90245 » Mon Nov 14, 2011 12:52 pm

yobria wrote:
bob90245 wrote:
Larry Swedroe wrote:Investors withdrew almost $18 billion from the market in October, marking the sixth straight month of withdrawals seemingly in response to the market dip we experienced from May through September. It was bad timing, as the S&P 500 Index returned almost 11 percent in October, more than the annualized return the market has provided over the long term.
Which begs the question. All stocks have to be owned by someone. If $18 billion are being sold, who is on the other side of the trade buying $18 billion?
That number is only for traditional mutual funds. From the link in the article:
Exchange-traded funds: Investors deposited a net $19 billion into ETFs, which bundle together investments in a particular market index. Unlike mutual funds, they can be traded during daily sessions just like stocks
Nick
Ah, I see. So we have been misled. All stock investors were actually net neutral.
Ignore the market noise. Keep to your rebalancing schedule whether that is semi-annual, annual or trigger bands.

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Re: Investors got it wrong again in October

Post by chaz » Mon Nov 14, 2011 1:07 pm

Timing isn't good.
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Re: Investors got it wrong again in October

Post by nisiprius » Mon Nov 14, 2011 1:35 pm

I worry about confirmation bias in statements like this. Do "investors" consistently get it wrong, or does it only spur articles when they do?

I've said before that I just do not believe that naïve investors are endowed with the ability to time the market in reverse, and I'm skeptical of "retail investors always get it wrong" and suchlike things when presented as cheerleading for staying the course.

I did read one article once that suggested that there is a systematic pattern of by retail customers placing limit orders and failing to cancel them when simple actionable news emerges, but that's not what's happening here.

I would expect that the consequences of panic, failed market timing attempts, following the herd, etc. would not be a difference in long-term return. I would expect it to be "merely" a large and unrewarded increase in "manager risk."

I'll admit I don't know how to account for the frequently reported observation that "the returns investors earn are well below the return of the very funds in which they invest," which has been stated by John C. Bogle, among others. But there's something wrong with that statement. I admit I haven't looked at the studies that report it. But what does that mean? How can it be? Every dollar the funds earn gets paid out to someone, so how can the average returns earned by investors in a fund be different from the returns of the fund itself? Is it some statistical nicety, like 20% of the fund's shareholders do much better than the fund and 80% of them do slightly worse? Or what?

Something's wrong here. Contrarian investing is not a new idea--I literally first heard the phrase in the 1960s when my dad's lawyer happened to mention it to me--but it is not the magic key to wealth. "Be fearful when others are greedy and greedy when others are fearful" is like "Buy low, sell high"--it's a description of a hoped-for outcome, not an actionable investing formula. If investors--or retail investors, or small retail investors in mutual funds--systematically get it wrong, why isn't it easy just to do the opposite?

Perhaps the "hypothetical" returns of the fund are not actually achievable? Perhaps they are only achievable because nobody actually buys $10,000 in Wellington in 1929 and leaves it there until 2011, and the fund would perform substantially worse if every investor actually stayed the course and bought and held it?
Last edited by nisiprius on Mon Nov 14, 2011 1:42 pm, edited 1 time in total.
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Re: Investors got it wrong again in October

Post by larryswedroe » Mon Nov 14, 2011 1:41 pm

Few thoughts
The institutional investors who tend to be more disciplined and thus rebalance, buy after periods of poor performance when individuals are selling. And people like Buffett who likes to buy when expected returns are high while individuals appear to like to sell when expected returns are high and buy when they are low (of course they probably don't know they are doing that).

The data clearly shows from many studies that investors earn returns well below those of the very funds they invest in, because they exhibit this pattern

Best wishes
Larry

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Re: Investors got it wrong again in October

Post by trico » Mon Nov 14, 2011 1:49 pm

Markets go up and down. The way to profit from this is buy right before the market goes up, and sell right before the market goes down. Seems simple enough.

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Re: Investors got it wrong again in October

Post by zotty » Mon Nov 14, 2011 2:03 pm

nisiprius wrote: Perhaps the "hypothetical" returns of the fund are not actually achievable? Perhaps they are only achievable because nobody actually buys $10,000 in Wellington in 1929 and leaves it there until 2011, and the fund would perform substantially worse if every investor actually stayed the course and bought and held it?
Hehe. I thought i understood and could answer intelligently, until i actually tried to do so. Now I am confused.

I think people underperform because they move money in and out. Yet the act of moving money in and out means that they aren't really holding the fund, so it's not apples to apples to say that the underperform the fund, since they aren't really holding the fund.

If we "double buffer" it, it might work. Say you have two funds, and you tactically shift money around. Portfolio return underperforms because of this, but I'm still not sure it's reasonable to say that you are underperforming either fund, or maybe it is.

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Re: Investors got it wrong again in October

Post by hsv_climber » Mon Nov 14, 2011 2:05 pm

yobria wrote: That number is only for traditional mutual funds. From the link in the article:
Exchange-traded funds: Investors deposited a net $19 billion into ETFs, which bundle together investments in a particular market index. Unlike mutual funds, they can be traded during daily sessions just like stocks
Nick
That was my impression as well when I've first read the article and I wanted to post about it.
But then I did a bit of V&V...

Here is the link to data: http://www.ici.org/research/stats

And here is a link to Sept. ETF data: http://www.ici.org/research/stats/etf/etfs_09_11

It shows that ETF assets were down in Sept.. I could not find data for Oct. yet. Of course, part of that could be market evaluations. But in any case, people were not buying equity ETFs.

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Re: Investors got it wrong again in October

Post by richard » Mon Nov 14, 2011 2:44 pm

nisiprius wrote:I worry about confirmation bias in statements like this. Do "investors" consistently get it wrong, or does it only spur articles when they do?

I've said before that I just do not believe that naïve investors are endowed with the ability to time the market in reverse, and I'm skeptical of "retail investors always get it wrong" and suchlike things when presented as cheerleading for staying the course.
I've said the same thing. Collating the answers I've received results in: no one can routinely beat the market, but institutions routinely beat individuals because institutions are more disciplined. The tension between those statements is usually ignored.

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Re: Investors got it wrong again in October

Post by Minot » Mon Nov 14, 2011 3:06 pm

trico wrote:Markets go up and down. The way to profit from this is buy right before the market goes up, and sell right before the market goes down. Seems simple enough.
Provided your crystal ball is in good working order.
Minot

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Re: Investors got it wrong again in October

Post by gofigure » Mon Nov 14, 2011 3:31 pm

Study after study shows that the returns investors earn are well below the return of the very funds in which they invest. Advisor, columnist and author Carl Richards coined the phrase the "behavioral gap" to label the difference between investor returns and investment returns.
Even without the market volatility this roll your own retirement stuff takes a steady hand.

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Re: Investors got it wrong again in October

Post by 3CT_Paddler » Mon Nov 14, 2011 3:36 pm

nisiprius wrote:Something's wrong here. Contrarian investing is not a new idea--I literally first heard the phrase in the 1960s when my dad's lawyer happened to mention it to me--but it is not the magic key to wealth. "Be fearful when others are greedy and greedy when others are fearful" is like "Buy low, sell high"--it's a description of a hoped-for outcome, not an actionable investing formula. If investors--or retail investors, or small retail investors in mutual funds--systematically get it wrong, why isn't it easy just to do the opposite?
Maybe I am thinking about it incorrectly, but it appears to me that you probably were "greedy when others are fearful" simply based on the fact that you didn't capitulate (I am guessing :) ) during the 2008 financial crisis. There was a very real risk that many investments in the financial sector (and other sectors) were going to be worthless. But if you were a disciplined (or disinterested) investor, you didn't sell equities and buy Treasuries to reduce your risk. And you were rewarded for taking that risk in the relative short term.

Also before the crisis many institutions employed leverage to improve returns. When everything was going south, they were forced to "buy low, and sell high" to meet margin requirements. So just by doing nothing and staying the course (and not using leverage), you were able to avoid the short term carnage that ruined others.

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Re: Investors got it wrong again in October

Post by dnaumov » Mon Nov 14, 2011 3:39 pm

richard wrote:
nisiprius wrote:I worry about confirmation bias in statements like this. Do "investors" consistently get it wrong, or does it only spur articles when they do?

I've said before that I just do not believe that naïve investors are endowed with the ability to time the market in reverse, and I'm skeptical of "retail investors always get it wrong" and suchlike things when presented as cheerleading for staying the course.
I've said the same thing. Collating the answers I've received results in: no one can routinely beat the market, but institutions routinely beat individuals because institutions are more disciplined. The tension between those statements is usually ignored.
Define routinely?

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Re: Investors got it wrong again in October

Post by nisiprius » Mon Nov 14, 2011 4:30 pm

larryswedroe wrote:The institutional investors who tend to be more disciplined and thus rebalance,
Well, this is another troubling thing. Having read various things about rebalancing and the "rebalancing bonus," I thought I had it straight that slice-and-dicers do not believe rebalancing automatically increases return. I thought the theory was rebalancing captures "momentum" effects that are believed to exist over certain periods of time, 3-12 months, I think. And that if you rebalance more frequently than that you don't get the benefit.

It true...

I don't see how an institution can benefit from rebalancing, other than as risk control. I don't see how the disciplined institution can take money away, on the average, from undisciplined investors, because I don't see how an institution can afford to wait very long between rebalancing events. I can't imagine Yale University rebalancing once a year or waiting for its assets to go outside rebalancing bands, because that would create a need for huge transactions which would move the market and create high transaction costs. Maybe I'm totally wrong about that, and Yale etc. do rebalance only infrequently?
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Re: Investors got it wrong again in October

Post by richard » Mon Nov 14, 2011 5:07 pm

dnaumov wrote:
richard wrote:I've said the same thing. Collating the answers I've received results in: no one can routinely beat the market, but institutions routinely beat individuals because institutions are more disciplined. The tension between those statements is usually ignored.
Define routinely?
More than by chance.

It's possible to be lucky, so you can't say no one ever beats the market. Obviously, everyone can't beat the market, any more than everyone can be above average (the Lake Wobegon effect).

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Re: Investors got it wrong again in October

Post by richard » Mon Nov 14, 2011 5:15 pm

nisiprius wrote: Maybe I'm totally wrong about that, and Yale etc. do rebalance only infrequently?
Swensen says they rebalance every day. He recommends that individuals rebalance quarterly. The difference is due to taxes and transaction fees and the lack of a full time staff for individuals.

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Re: Investors got it wrong again in October

Post by kenner » Mon Nov 14, 2011 5:18 pm

nisiprius wrote: I can't imagine Yale University rebalancing once a year or waiting for its assets to go outside rebalancing bands, because that would create a need for huge transactions which would move the market and create high transaction costs. Maybe I'm totally wrong about that, and Yale etc. do rebalance only infrequently?
Yale's David Swensen rebalances often (at least as of 2006):

http://www.npr.org/templates/story/stor ... Id=6203264

"Swensen rebalances his portfolio at Yale at least every day, and often many times throughout the day. What does that mean?

Let's say U.S. stocks go up 2 percent one afternoon, while international stocks decline by 1 percent. If you have holdings in both areas, the percentage of your portfolio that's in U.S. stocks has grown a bit, and the foreign-equity portion has shrunk a little. Over time, this process can really change the face of your portfolio — especially if you continue to reinvest your earnings, or make contributions to a 401k or 403b, without ever rebalancing.

So, Swensen says, you need to regularly rebalance your holdings to keep them steady. That way, when the value of foreign stocks or emerging-market stocks rises, you'll own more of them — and will make more money — if you rebalanced while these stocks were cheaper. "

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Re: Investors got it wrong again in October

Post by jidina80 » Mon Nov 14, 2011 5:34 pm

bob90245 wrote:Which begs the question. All stocks have to be owned by someone. If $18 billion are being sold, who is on the other side of the trade buying $18 billion?
I, too, found the article a little confusing. After all, stocks tend to go up when there is more buying pressure than selling pressure.

The second paragraph in the article begins "Investors withdrew almost $18 billion from the market in October,..." which I took to mean all investors, institutional and individuals through all sales channels.

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Re: Investors got it wrong again in October

Post by Lbill » Mon Nov 14, 2011 5:35 pm

Investors withdrew almost $18 billion from the market in October, marking the sixth straight month of withdrawals seemingly in response to the market dip we experienced from May through September.
Per Bob's previous post, all assets have to be owned by someone, so how could $18 billion have simply evaporated from the market? Maybe there was $18 billion less because that's how much value was lost when stock prices went down. Next we'll hear that these same silly investors are chasing stocks when prices go up and equity values increase by $18 billion. Seems a tad circular doesn't it?
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Re: Investors got it wrong again in October

Post by nisiprius » Mon Nov 14, 2011 5:41 pm

kenner wrote:"Swensen rebalances his portfolio at Yale at least every day, and often many times throughout the day.
So, does daily or more-than-daily rebalancing increase return? Is Swensen's disciplined rebalancing taking away money from undisciplined individual investors?

If so, why?

I've mentioned before that if you look at the growth chart of Vanguard Balanced Index Fund, and pick two dates before and after 2008-2009, such that if you start with $10,000, the final value, including reinvested dividends, is as close to $10,000 as possible... the result is virtually identical to putting $6,000 in Total Stock and $4,000 in Total Bond on the same starting date, and not rebalancing.

Google Books isn't finding me the relevant passages in Swedroe's books, but William J. Bernstein in The Intelligent Asset Allocator says "as a rule, long rebalancing intervals are to be preferred. This is because of the momentum phenomenon discussed in Chapter 7... if you rebalance every year or two, you probably won't go wrong."

If you rebalance every year or two, is your disciplined rebalancing taking away money from Swensen's disciplined but too-frequent rebalancing?
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Re: Investors got it wrong again in October

Post by larryswedroe » Mon Nov 14, 2011 7:15 pm

Lbill
No institutional investors were buying while the "dumb" individuals were doing what they always do, invest as if they are driving forward while looking in the rear view mirror, investing as if they can buy yesterday's returns.
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Re: Investors got it wrong again in October

Post by larryswedroe » Mon Nov 14, 2011 7:18 pm

Nisprius
Long intervals for rebalancing will increase returns as you don't sell higher expected returning assets and you benefit from momentum. But remember momentum works only in the intermediate term, then you get RTM

But the purpose of rebalancing is to control risk, not increase returns, and that thus in world of no costs the only rational strategy is to rebalance daily. But we do have costs so we don't rebalance daily. And time is even a cost

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Larry

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Re: Investors got it wrong again in October

Post by nisiprius » Mon Nov 14, 2011 7:33 pm

larryswedroe wrote:Nisprius
Long intervals for rebalancing will increase returns as you don't sell higher expected returning assets and you benefit from momentum. But remember momentum works only in the intermediate term, then you get RTM

But the purpose of rebalancing is to control risk, not increase returns, and that thus in world of no costs the only rational strategy is to rebalance daily. But we do have costs so we don't rebalance daily. And time is even a cost

Best
Larry
Thanks!
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Re: Investors got it wrong again in October

Post by larryswedroe » Mon Nov 14, 2011 7:51 pm

Nisprius
Quite welcome
Best
Larry

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Re: Investors got it wrong again in October

Post by renditt » Mon Nov 14, 2011 8:37 pm

larryswedroe wrote:Thought you might find this of interest

http://www.cbsnews.com/8301-505123_162- ... ncol;lst;1

Best wishes
Larry
Sorry Larry but this is just data mining. Looking at the fund flow data at http://www.ici.org, I could easily claim the opposite is true and investors are actually great market timers:

- There were big inflows in equity mutual funds from April to August 2009 when the S&P moved from 840 to 1030
- Another example are the months of June and July this year with the S&P between 1270 and 1350, when investors withdrew 23bn in June and 32bn in July.

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Re: Investors got it wrong again in October

Post by larryswedroe » Mon Nov 14, 2011 8:54 pm

renditt
What I read is that over 300 billion poured out of equity funds after the bear market--09-10 only ending in late 2010
Note the data is very clear on this, investor returns are well below, by wide margin the returns of the very funds they invest in.
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Larry

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Re: Investors got it wrong again in October

Post by renditt » Mon Nov 14, 2011 9:15 pm

Larry
I'm not disputing your statement that investor returns are less than the funds (I actually don't know if that's true as I don't have the data).

All I'm saying that it seems odd to use the october outflows as 'prove' that investors are bad market timers, when investors have in fact withdrawn money every month since May this year, thereby avoiding the big decreases in August and September. Where was the article in September praising investors for the great marking timing skills? I guess that wouldn't have worked with your main thesis of the article (that investors returns are lower than the fund returns).

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Re: Investors got it wrong again in October

Post by peter71 » Mon Nov 14, 2011 10:48 pm

Hi Renditt,

Thanks for looking into the data on outflows.

As for investor returns, this post from The Finance Buff seems like a fair-minded estimate of the behavior gap as at most 0.27% per annum:

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

Not nothing (as DIY'er's like me would wish) but also not nearly as much as advisors would like to have people believe.

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Pete

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Re: Investors got it wrong again in October

Post by A Devout Indexer » Mon Nov 14, 2011 11:02 pm

Lbill wrote:
Investors withdrew almost $18 billion from the market in October, marking the sixth straight month of withdrawals seemingly in response to the market dip we experienced from May through September.
Per Bob's previous post, all assets have to be owned by someone, so how could $18 billion have simply evaporated from the market? Maybe there was $18 billion less because that's how much value was lost when stock prices went down. Next we'll hear that these same silly investors are chasing stocks when prices go up and equity values increase by $18 billion. Seems a tad circular doesn't it?
There is a stock market and a bond market. Even though both stock and bond markets clear, the stock market does so at lower prices (to equilibriate the fact that there is more $ that wishes to leave the stock market than enter the market) and the bond market does so at higher prices (to equilibrate, the fact that there is more $ that wishes to enter the bond market than leave the bond market). The excess bond market cash inflows are, of course, from the stock market.
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Re: Investors got it wrong again in October

Post by hazlitt777 » Mon Nov 14, 2011 11:05 pm

trico wrote:Markets go up and down. The way to profit from this is buy right before the market goes up, and sell right before the market goes down. Seems simple enough.
I would imagine that is what a very few are able to do...by luck or by special inside knowledge or because they have special expertise in certain areas. For those of us to whom this doesn't pertain, we are best off buying holding and rebalancing a well diversified portfolio.

Nisiprius brings up a good question. My thought is that if many investors are consistently losing then, the above market returns either go toward the cost of the buying and selling...financial companies, or to those investors who are able to operate with knowledge that is not known to the broader market. It has to be one or the other, or some combination of the two.

In all this, diversify, buy and hold, rebalance, will win the day for those of us who do not have that special knowledge.

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Re: Investors got it wrong again in October

Post by hazlitt777 » Mon Nov 14, 2011 11:12 pm

bob90245 wrote:
Larry Swedroe wrote:Investors withdrew almost $18 billion from the market in October, marking the sixth straight month of withdrawals seemingly in response to the market dip we experienced from May through September. It was bad timing, as the S&P 500 Index returned almost 11 percent in October, more than the annualized return the market has provided over the long term.
Which begs the question. All stocks have to be owned by someone. If $18 billion are being sold, who is on the other side of the trade buying $18 billion?
I don't think it begs the question because those who bought, bought low, at least in reference to when the article was written. Maybe as time does on, their purchase will be deemed a bad one if the market does way down tomorrow.

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Re: Investors got it wrong again in October

Post by larryswedroe » Tue Nov 15, 2011 8:37 am

Renditt
I did not say that it PROVED anything. It was a demonstration, an example, of investors repeating past behavior and it is repetitive
Another example of this is that after Meredith Whitney's forecast on munis huge outflows occurred from muni funds. Of course rates rallied and individual investors missed out.
Only recently did money start coming back
Larry

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Re: Investors got it wrong again in October

Post by grayfox » Tue Nov 15, 2011 9:04 am

renditt wrote:Larry
I'm not disputing your statement that investor returns are less than the funds (I actually don't know if that's true as I don't have the data).

All I'm saying that it seems odd to use the october outflows as 'prove' that investors are bad market timers, when investors have in fact withdrawn money every month since May this year, thereby avoiding the big decreases in August and September. Where was the article in September praising investors for the great marking timing skills? I guess that wouldn't have worked with your main thesis of the article (that investors returns are lower than the fund returns).
foregone conclusion: a conclusion formed in advance of argument or consideration.

When someone has an axe to grind, they will latch onto any data that supports their foregone conclusion. Any data that does not support the foregone conclusion is ignored or rejected.

So thanks, redditt, for digging deeper into the mutual fund flow data with an open mind. Next, what comes into play is the Upton Sinclair quote below.

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Re: Investors got it wrong again in October

Post by Lbill » Tue Nov 15, 2011 9:37 am

From the TFB post referenced by Pete upthread:
Because DALBAR sells the study to financial advisors to show how investors do poorly on their own, DALBAR has an incentive to exaggerate the effect of poor investor behavior. To its credit, the latest DALBAR study also shows investor returns of a dollar cost averaging investor. If an investor invests a fixed amount in equity funds every year, the investor return would be 3.44% a year for 20 years, compared to the actual investor return of 3.17% a year. That’s more plausible. Investors lost 0.27% a year due to "buy high sell low."
The myth of the dumb money investor may be greatly exaggerated. It cannot be proved by a selective interpretation of the data on fund flows. I expect the above quote is a little closer to the truth. I think stock investors may be stupid all right but that's a longer story...
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Don Christy
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Re: Investors got it wrong again in October

Post by Don Christy » Tue Nov 15, 2011 9:53 am

I'm a little confused. Seems like the article references data stating almost equal withdrawals from stocks and additions to ETFs, basically net neutral. Couldn't another plausible explanation be tax loss harvesting from mutual funds to ETFs after 12% decline in Aug/Sep? Don't we need to look at inflows and outflows comprehensively to ake any sense of it?

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Re: Investors got it wrong again in October

Post by sschullo » Tue Nov 15, 2011 10:57 am

Not sure if this piece from Peter Lynch adds anything to this dicussion of poor investor behavior:

During the October crash of 1987, Peter Lynch, manager of Fidelity Magellan wrote in his book, Beating the Street: “I had to sell a lot of stock to raise cash to pay off the shareholders who got scared out of their assets. Magellan had 689 million in sales in October…. The sellers outnumbered the buyers two to one, but the vast majority of Magellan investors stayed put and did nothing.” So what happened to the stock market after those panicky days? Lynch concludes, “They saw the Great Correction for what it was, and not as the beginning of the end of civilization.“

Seems to me that there isn't enough credit for good behavior by individual investors by staying put no matter what. I heard that 90% of trading is from the professionals and 10% is from individuals. Is there any evidence for those figures?
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Re: Investors got it wrong again in October

Post by richard » Tue Nov 15, 2011 11:21 am

hazlitt777 wrote:
bob90245 wrote:
Larry Swedroe wrote:Investors withdrew almost $18 billion from the market in October, marking the sixth straight month of withdrawals seemingly in response to the market dip we experienced from May through September. It was bad timing, as the S&P 500 Index returned almost 11 percent in October, more than the annualized return the market has provided over the long term.
Which begs the question. All stocks have to be owned by someone. If $18 billion are being sold, who is on the other side of the trade buying $18 billion?
I don't think it begs the question because those who bought, bought low, at least in reference to when the article was written. Maybe as time does on, their purchase will be deemed a bad one if the market does way down tomorrow.
The point is that investors as a whole cannot gain or lose by market timing (other than expenses, taxes and the like).

Some group of investors can underperform by bad trading. All investors can not underperform by bad trading.

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Re: Investors got it wrong again in October

Post by bob90245 » Tue Nov 15, 2011 11:38 am

richard wrote:
hazlitt777 wrote:
bob90245 wrote:
Larry Swedroe wrote:Investors withdrew almost $18 billion from the market in October, marking the sixth straight month of withdrawals seemingly in response to the market dip we experienced from May through September. It was bad timing, as the S&P 500 Index returned almost 11 percent in October, more than the annualized return the market has provided over the long term.
Which begs the question. All stocks have to be owned by someone. If $18 billion are being sold, who is on the other side of the trade buying $18 billion?
I don't think it begs the question because those who bought, bought low, at least in reference to when the article was written. Maybe as time does on, their purchase will be deemed a bad one if the market does way down tomorrow.
The point is that investors as a whole cannot gain or lose by market timing (other than expenses, taxes and the like).

Some group of investors can underperform by bad trading. All investors can not underperform by bad trading.
Right. In fact, all investors were net neutral because there were $19 billion of stock purchased by ETF investors. This explanation was posted immediately after by yobria.
Ignore the market noise. Keep to your rebalancing schedule whether that is semi-annual, annual or trigger bands.

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Re: Investors got it wrong again in October

Post by A Devout Indexer » Tue Nov 15, 2011 12:45 pm

bob90245 wrote:
richard wrote:
hazlitt777 wrote:
bob90245 wrote:
Larry Swedroe wrote:Investors withdrew almost $18 billion from the market in October, marking the sixth straight month of withdrawals seemingly in response to the market dip we experienced from May through September. It was bad timing, as the S&P 500 Index returned almost 11 percent in October, more than the annualized return the market has provided over the long term.
Which begs the question. All stocks have to be owned by someone. If $18 billion are being sold, who is on the other side of the trade buying $18 billion?
I don't think it begs the question because those who bought, bought low, at least in reference to when the article was written. Maybe as time does on, their purchase will be deemed a bad one if the market does way down tomorrow.
The point is that investors as a whole cannot gain or lose by market timing (other than expenses, taxes and the like).

Some group of investors can underperform by bad trading. All investors can not underperform by bad trading.
Right. In fact, all investors were net neutral because there were $19 billion of stock purchased by ETF investors. This explanation was posted immediately after by yobria.

Unless I missed it, the quote only said $19B into ETFs as a class of investments. NOT stock ETFs in particular. I would like to see how much money going into ETFs were specifically bond investments.

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Re: Investors got it wrong again in October

Post by A Devout Indexer » Tue Nov 15, 2011 1:02 pm

richard wrote:
hazlitt777 wrote:
bob90245 wrote:
Larry Swedroe wrote:Investors withdrew almost $18 billion from the market in October, marking the sixth straight month of withdrawals seemingly in response to the market dip we experienced from May through September. It was bad timing, as the S&P 500 Index returned almost 11 percent in October, more than the annualized return the market has provided over the long term.
Which begs the question. All stocks have to be owned by someone. If $18 billion are being sold, who is on the other side of the trade buying $18 billion?
I don't think it begs the question because those who bought, bought low, at least in reference to when the article was written. Maybe as time does on, their purchase will be deemed a bad one if the market does way down tomorrow.
The point is that investors as a whole cannot gain or lose by market timing (other than expenses, taxes and the like).

Some group of investors can underperform by bad trading. All investors can not underperform by bad trading.
If a majority of investors sell shares at prices below what they acquired them for to a minority of buyers (for example: if fewer buyers emerge at a given price, then prices fall instantaneously to the point where a greater number of sellers can transact with a fewer number of buyers and markets clear), then we have a net loss in investor returns. At the same time, those sellers move their diminished equity proceeds to the treasury market where our buying minority is able to liquidate bonds at prices above their purchase value.

As Larry said, you have the vast majority of undisciplined individual investors and fledgling investment advisors in the former camp, with most bogleheads, passive fee-only advisors an well heeled institutions in the later.

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Re: Investors got it wrong again in October

Post by GregLee » Tue Nov 15, 2011 1:23 pm

bob90245 wrote:Which begs the question. All stocks have to be owned by someone. If $18 billion are being sold, who is on the other side of the trade buying $18 billion?
Me, for one. So I got a little piece of that $18 billion.
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Re: Investors got it wrong again in October

Post by Hector » Tue Nov 15, 2011 2:50 pm

Isn't this going to be new normal as baby boomers are starting to withdraw money in their retirement?

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Re: Investors got it wrong again in October

Post by bob90245 » Tue Nov 15, 2011 3:10 pm

Hector wrote:Isn't this going to be new normal as baby boomers are starting to withdraw money in their retirement?
That's a totally different topic. However, there are two schools of thought on this:

1) Most Baby Boomers have little in the way of stock market savings anyway. So what ever selling they do, would not be very significant compared to flows from other sources.

2) Stock market wealth is concentrated in a very small number of households that are the very rich. And they aren't going to be needing to sell much stock to support their lifestyle. Most of their assets will be passed on to their heirs and charities. Warren Buffett and Bill Gates are the most conspicious examples.
Ignore the market noise. Keep to your rebalancing schedule whether that is semi-annual, annual or trigger bands.

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Re: Investors got it wrong again in October

Post by tfb » Tue Nov 15, 2011 4:33 pm

larryswedroe wrote:What I read is that over 300 billion poured out of equity funds after the bear market--09-10 only ending in late 2010
Note the data is very clear on this, investor returns are well below, by wide margin the returns of the very funds they invest in.
Keep in mind there were nearly $5 trillion invested in equity funds as of end of 2009. Withdrawing $300 billion is 6% of the total. 94% of the money stayed the course. It's hard to come up with a model to show that bad timing on 6% of your money will have a devastating effect on your long term return.
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Re: Investors got it wrong again in October

Post by learning_head » Tue Nov 15, 2011 4:48 pm

nisiprius wrote: I'll admit I don't know how to account for the frequently reported observation that "the returns investors earn are well below the return of the very funds in which they invest," which has been stated by John C. Bogle, among others. But there's something wrong with that statement. I admit I haven't looked at the studies that report it. But what does that mean? How can it be? Every dollar the funds earn gets paid out to someone, so how can the average returns earned by investors in a fund be different from the returns of the fund itself? Is it some statistical nicety, like 20% of the fund's shareholders do much better than the fund and 80% of them do slightly worse? Or what?
As a simple explanation, I think this is what it means... Imagine fund F where investor A places $100 (for 1 fund share). A year later, it doubles to $200. Investors B, C, D, ..., Z at that time look around available funds and fund F pops up as a great fund to invest in because it doubled over last year. So, the 25 investors invests $1M there and the fund loses 25% next year and ends up at $150 (per fund share) by end of year two.

Overall fund returns are 50% over the course of 2 years, but most investors lose 25% in it...
Last edited by learning_head on Tue Nov 15, 2011 5:00 pm, edited 1 time in total.

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Re: Investors got it wrong again in October

Post by john94549 » Tue Nov 15, 2011 4:51 pm

When you're retired, and you get to that "magic number", it's all about keeping score. Right? :D

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Re: Investors got it wrong again in October

Post by larryswedroe » Tue Nov 15, 2011 5:44 pm

Here are examples from the Quest for Alpha

I would say source pretty credible

Morningstar studied the performance of mutual funds and their investors. It found that in all 17 fund categories they examined the returns earned by investors were below the returns of the funds themselves. For example, among large-cap growth funds the 10-year annualized dollar-weighted return was 3.4 percent less than the time-weighted return. For mid-cap growth and small-cap growth funds the underperformance was 2.5 and 3.0 percent. Investors in sectors funds fared worse with tech investors producing particularly disastrous results, underperforming the very funds they invested in by 14 percent per annum. Health care investors underperformed by 4 percent per annum and investors in financial sector funds underperformed by 1.6 percent per annum. Even value investors fared poorly, though their underperformance was not as severe. Large-cap value investors underperformed the funds they invest in by 0.4 percent per annum and small-cap value investors underperformed by 2.0 percent per annum.5
Morningstar has found that volatile funds (often focused on one sector) tend to have the greatest discrepancies between TWR and DWR. They note: “Volatile funds may entice investors on the upswing, but spook them into withdrawing during rough patches. So, investors in volatile funds can unwittingly end up buying high and selling low.” They provided examples demonstrating how destructive investor behavior can be. The returns are all for the five-year period ending July 2009:
Fund TWR (Investment Return) (%) DWR (Investor Return) (%) Gap(%)
CGM Focus (CGMFX) 8.8 -18.3 27.1
Fairholme (FAIRX) 8.6 -1.7 10.3
Schneider Value (SCLMX) -4.0 -18.4 14.4

As bad as those figures are, the damage was even worse for the one fund for which 10-year data was available, CGM Focus. The TWR was 17.8 percent while the DWR was
–16.8, producing a gap of an incredible 34.6 percent per annum.

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