We Are Not as Smart as We Think

A&I Financial Services > Periscope Newsletter > We Are Not as Smart as We Think
Dalbar, a research firm, says most investors don’t know how to invest. (1) and nbsp;Highlights of this year’s study include:
  1. Investors don’t do as well as the market; in fact, they do 4.20% worse per year. and nbsp;
  2. Another way to say that is, the 20 year average return earned by investors for an equity fund was 5.02% compared to 9.22% for the S and amp;P 500. and nbsp;
  3. Another way to say that is that had the investing public not done anything, they would have done 80% better than the 5% they earned.
  4. The primary reason is market timing. and nbsp;
  5. This is a consistent trend; under any other measured period (10 year, 5 year, 3 year and 1 year). and nbsp;
  6. Attempts to change this trend through consumer education are futile. and nbsp; and nbsp;

Perhaps the best advice your financial advisor may give you is to do nothing at all. Indeed, from our perspective, the greatest value we deliver is the one that eliminates or minimizes the “behavior gap” between doing nothing and giving up what could be 80% of the gains.

On the other hand, a Wall Street Journal editor, Jason Zweig, says Dalbar has it wrong (or at least exaggerates how dumb we are):

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“Dalbar’s formula, according to these experts, has the effect of taking returns over the full period and dividing them by the total assets at the end-including money that wasn’t in the funds from start to finish. The result, they say, could significantly inflate the amount by which investors appear to lag behind their funds. (Another issue: Dalbar compares the returns of fund investors to an index rather than to the funds themselves.)” (2)

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Citations

1-Dalbar Study, and nbsp;2014 Quantitative Analysis of Investor Behavior and nbsp; and nbsp;available upon request. and nbsp;

2 – and nbsp;http://blogs.wsj.com/moneybeat/2014/05/09/just-how-dumb-are-investors/?KEYWORDS=dalbar

About the author

Karl Frank, Certified Financial Planner ®, MSF, MBA, MA, is the President of A&I Financial Services LLC, a local business that specializes in wealth management, insurance planning, and retirement planning. Karl cares for business owners and the businesses that care for them. Learn More about Karl.

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