Market Timing Costs Investors Big: Dalbar
From: thinkadvisor.com
Dalbar’s annual study of investor behavior shows that self-directed investors work against themselves largely by chasing the market.
Investors are their own worst enemy, or so is the conclusion of Dalbar’s 22nd annual Quantitative Analysis of Investor Behavior study that compared equity fund returns of directed investments versus the market benchmark. This year’s study found that in 2015, investors returns came in at -2.28% for equity funds while the S&P 500 benchmark had incremental gains of 1.38%, thus the average equity investor underperformed the S&P 500 by 3.66 percentage points. The good news is that’s better than 2014, in which investors left 8.19 percentage points on the table.
The bad behavior wasn’t limited to equity funds, Dalbar found. Those selecting asset allocation funds had returns of -3.48% (vs. the 1.38% S&P 500), and fixed income funds had -3.11% returns, versus the Barclays Aggregate Bond Index return at .55%. Bottom line: “Investment results are more dependent on investor behavior than on fund performance,” Dalbar concludes. “Mutual fund investors who hold on to their investments have been more successful than those who try to time the market.”
Lou Harvey, Dalbar CEO, says one of the biggest surprises in this year’s study was the large impact expenses, i.e. fees, have on returns. Fund expenses, including management fees, account for almost 23% (vs. bad behavior being 42.6%) of the major causes of equity investor underperformance. Not only do fees determine which funds investors choose, but they take a bite out of returns at a higher level than Harvey expected. Other causes include the investor needing cash (planned or unplanned), and lack of availability of cash to invest.
Yet the investor truly is the problem, including being loss averse rather than risk averse. “From an industry perspective, language we use and look at is in terms of risk, like market risk, credit risk, volatility risk,” Harvey explains. “We’ve found investors have a simple view: they don’t want to lose money. We must think in terms of investor pocketbook and not get sidetracked on [risks].”
