Dalbar Research

In a press release dated April 21st, 2015 Dalbar research posts a chart from their annual Quantitative Analysis of Investor Behavior (QAIB) study for 2014.  Below is the chart.

The chart shows the cumulative returns by time or years of investors versus the S&P 500 Index and Barclays Bond Index.  According to their study you can see on average most investors underperform the indexes. The reasoning behind this is that most investors don’t have the emotions for investing, so they remove or add funds based on what they see happening at the time.  The problem with this is that by the time they see it they are late in either direction.  

As further example of this Dalbar states in a press release dated April 4th, 2017, “For the 12 months ended December 20, 2016, the S&P 500 index produced an impressive annual return of 11.96%, while the average equity mutual fund investor earned only 7.26%, a gap of 4.70 percetange points.”  They go on to say that this underperformance was attributable to three months in 2016.

On April 17th, 2019 Dalbar released information for their QAIB 2018 report and they state, “In 2018, the average equity fund investor lost twice as much as the S&P.”  They further detail that the majority of losses occurred in the second half of 2018. On March 25th, 2019 Dalbar comments further on 2018 and they state, “judging by the cash flows we saw, investors sensed danger in the markets and decreased their exposure but not nearly enough to prevent serious losses.  Unfortunately, the problem was compounded by being out of the market during the recovery months. As a result, equity investors gained no alpha, and in fact trailed the S&P 500 by 504 basis points.”  

Over time and historically the S&P 500 index averages returns around 7%.  In my readings I’ve come across information estimating the average investor only really captures about 5% of that S&P 500 index 7% average return due to their removing and adding money from their accounts trying to avoid the hazards of the market and trying to catch the uptrends.  Hence, the advice from your friendly index advisor to stay the course for the long term and do not touch your money. Great, problem solved. But is it? If you’re averaging a 7% return over the long term it will take ten years for your money to double. Yes, you read correctly, ten years.  So if you start with an investment of one hundred thousand dollars earning 7% annually at the end of ten years your starting balance would be worth two hundred thousand dollars. So if you have twenty or thirty years to invest before you’ll need your money and starting with one hundred thousand dollars you might have a good little nest egg, “IF YOU DON’T TOUCH IT!”

Unfortunately, most people have to live a lot of years before they have that kind money to invest.  They have kids, expenses, and aren’t willing to sacrifice their lifestyle, so they can save much. This, in my opinion, all goes back to one of the most important facts that we all should be taught at a young age, and that is learning how to manage your finances and invest is important.  The other important point I stress is that most of us will only have a handful of big opportunities presented to us in our life where we can change our financial future geatly, and knowing when that opportunity is in front of us, so we can use it to our advantage, is important.

Working hard and living frugally will enable you to earn, so you can save.  Once you have enough money saved you will have to know how to make it work for you.  This requires learning and obtaining knowledge. Investing is a skill. It has to be learned just the same as cooking and framing a house are learned skills.  

The best advice I can give anyone today is read as much as you can to discover those answers.  Ask questions of those that have the experience. Most will be happy to share their knowledge with you.  Be humble and don’t jump at the first piece of information you absorb. When it comes to your money, put an emphasis on real world experience and advice.  If you’ve never had the money and dealt with the emotions of making a financial decision of great importance to you it can be gut wrenching. The stock market has a way of taking over confidence and flushing it down the drain and that can be scary and emotionally tough.  Get yourself educated and prepared, so you make good sound choices. After all, it’s your money.