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VIEWPOINT: Still underperforming! Markets outperform investors

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‘The results show that the average investor earns less – in many cases substantially less – than unit trust performance statistics.’ DALBAR’s Quantitative Analysis of Investor Behavior (QAIB) has been measuring the effects of investor decisions to buy, sell and switch between unit trusts over both short- and long-term timeframes.  The results consistently show that the average investor earns less – in many cases substantially less – than unit trust performance statistics. The recently released QAIB 2014 report covering the last 30 years – including the crashes of 1987, the turn of the millennium, 2008, and the recovery periods of 2009, 2010 and 2012 – supports this key conclusion. QAIB demonstrates that individual investors often fail even while markets are booming, and suggests investors should not judge their investment success by market index comparisons (increasing the likelihood of switching) but rather by evaluating their progress towards achieving their personal financial goals. The report also argues that investor education has had little impact on controlling fickle investor behaviour among individuals.

KEY FINDINGS

  • The average equity investor outperformed the systematic equity investor for the fourth year in a row, but systematic fixed income investors outperformed average fixed income investors by five times.
  • The gap between the 20-year S&P 500 return and the average equity fund investor return increased from 8,2% to 9,2% (100 bps) in 2013 while the average equity fund investor return increased from 4,3% to only 5,0% (70 bps).
  • Risk tolerance is not static: it can vary greatly based on an individual’s goal, life stage and experience.
  • Investors value capital preservation in bear markets, but generally ignore it in bull markets.
  • The best asset allocators were able to halve investors’ losses in 2008 through the use of capital preservation strategies. Within well-planned strategies, losses were avoided entirely.
  • Capital preservation is an important consideration when evaluating investment performance. The financial services industry needs to address this to incorporate both capital preservation and capital appreciation and defines the relationship between each one.
  • Attempts to correct irrational investor behaviour through education have proven futile. The belief that investors will make prudent decisions after education and disclosure has been largely discredited.

Author: Mike Lledo CA(SA) is the CEO at Consolidated Financial Planning