A Review of Dalbar’s 2015 “Quantitative Analysis of Investor Behavior”

Dalbar researches and reports on the returns of investors compared to benchmark indices over various periods of time. These reports have demonstrated that the timing of purchases and sales by investors acts as a significant drag to their performance. In other words, investors’ choices cause poor performance. This quantifies and proves the statement made long ago by Benjamin Graham, “the investor’s chief problem – and even his own worst enemy – is likely to be himself.”

In this post, I share some of Dalbar’s most recent findings. But I also take it a step further by defining various terms and suggesting ways to improve assumptions made. The reader will notice that by making commonsense adjustments, the difference between the average investor return and index return is not as great as Dalbar reports, but is still significant. It should be known that the report I purchased from Dalbar is not the “Advisor Version”, rather it is the “Full Version” which includes permission to use their content pursuant to the rights of usage. That right is not extended to the reader. Should the reader wish to copy or use any of this information, it is recommended that they visit Dalbar for more information.

2014 Results – Click Graphic

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Average Equity Fund InvestorThese investors own mutual funds that invest entirely in stocks. Dalbar does not distinguish between the type of stock investments in the funds (i.e. capitalization, US vs. Int’l), yet it compares the equity fund investor to the S&P 500, an index of only large cap US stocks. Therefore adjustments may need to be made to their findings to make the results more realistic. This is especially true for 2014 because of the strong outperformance of large US stocks. I contacted Dalbar regarding this matter and they didn’t know how much specifically is invested in international stocks, but said it would be reasonable to expect 10% – 20%. If we were to go in the middle (15%) and adjust the index to 85% Total Market Index (to account for capitalization) and 15% EAFE, then the adjusted index return for 2014 would be 9.9% (Total Market: 12.5%, EAFE: -4.9% in 2014). Assuming funds were equally distributed between index and actively managed funds, it may be reasonable to deduct 0.50% to account for fund fees. This would lower the adjusted index return to 9.4%. After making those adjustments, the results are not as significant, but still represent sizable underperformance for the average equity investor. Since we have adjusted for allocation and fees, much of that 3.9% underperformance can be chalked up to investor behavior.

Average Fixed Income Investor Similar to equity investors, fixed income investors include all types of fixed income instruments (treasuries, corporate, high yield etc…). No attempt is made to correct this because the Barclays Aggregate Bond Index already includes various types of bonds. It is surprising to note that fixed income investors also fare quite poorly relative to the benchmark index, demonstrating that poor decisions are not unique to stocks.

Average Asset Allocation Investor These investors have purchased some sort of asset allocation fund – whether it be a balanced fund, conservative allocation, aggressive allocation or age-based fund. No attempt is made by Dalbar to differentiate between conservative and aggressive strategies, which could be a reason why there is no index used to benchmark for this performance. This designation appears to offer little value when it comes to investment returns since we have no indication if performance is due to allocation or other factors.


Historical Results – Click Graphic

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Notes The same adjustments made for 2014 can be made for these longer periods of time. However, even after making such adjustments it will be shown that there is still significant performance drag due to investor decisions on when to purchase and sell securities. There are periods of time when the drag is reduced and other periods when it is increased. It appears that investor behavior, while providing short-term relief by appeasing momentary emotions, has a cost of anywhere between 2% and 4% (or more) in a given year.

Footnote to Graphic

Composite Fund Investor The composite investor is simply a composite of all investors (stock, bond and asset allocation alike). Similar to the asset allocation investor, this figure has little value when identifying the cost of investor behavior because we don’t know what is causing the performance and what to compare it to.


Investors Can’t Hold On

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There are lots of reasons why investors perform poorly, but the bottom line is that many investors are incapable of actually investing. Rather, they cross that fine line from investing and into speculating. Investors tend to be more concerned with the price movements of the underlying security than in the enterprise value of the company. This is demonstrated by the average mutual fund retention rate. It is interesting to note that asset allocation fund investors tend to hold their funds longer than stock only or bond only mutual fund investors. This suggests that constructing a portfolio that is based on the investor’s goals and includes a well diversified mix of assets may help the investor remain invested for a longer period of time, and be less likely to speculate on short-term price movements.


Something Can Be Done

I travel the world speaking with both financial advisors and retail clients pertaining to the causes and costs of investor behavior. I discuss steps that can be taken to improve future investment decisions and ultimately future performance. To learn more about my presentations, please visit my Speaking page or you can contact me directly here.


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