Individual investors don’t know what they’re doing when it comes to investing!
That’s the opinion of DALBAR, the US market research firm who’ve been monitoring investment returns for three decades.
DALBAR are out with their yearly ‘Quantitative Analysis of Investor Behaviour’, which charts individual investor returns against the market.
And just like every other year since the report has been released, the individual investor is trailing the market.
In 2013 the average US equity fund investor achieved a 25.54% return, which seems quite impressive until you notice the S&P 500 Index returned 32.41%.
Over five years the individual investor trails the S&P 500 by 2.73%, over ten years they trail by 1.52% and over twenty years they’re lagging the index by 4.2% per annum.
To put that in perspective, an extra 4.2% pa, over twenty years, would mean more than doubling an investment balance.
Unfortunately it gets worse, DALBAR’s data stretches back 30 years and while the S&P 500 churned out 11.11% pa across that timeframe, the average equity fund investor only returned 3.69% pa.
The reason for this is the old “buy high and sell low” routine that investors engage in when they’re feeling good because the markets are up, or feeling bad because the markets are down.
DALBAR’s ‘Guess Right Ratio’, which measures inflows and outflows of funds, showed that in 2013 investors sold up in the two bad months, then piled back in after the markets went up again.
Had they held throughout the whole of 2013 they would have received the market return and not 6.87% less.
DALBAR then concluded in its report, “attempts to correct irrational investor behaviour through education have proved to be futile. The belief that investors will make prudent decisions after education and disclosure has been totally discredited.”
Here I disagree; DALBAR assumes those investors who trail the market have been thoroughly educated and are aware of potential mistakes.
From my personal experience, investors who’ve embraced education in turn make prudent decisions and don’t act irrationally when markets become turbulent.
Peter Mancell is a director of Mancell Financial Group and FYG Planners AFSL/ACL 224543, www.mfg.com.au This information is general in nature and readers should seek professional advice specific to their circumstances. Looking to reach your goals with one of Australia’s highly rated financial advisors?
