Investor Behaviour - The Enemy In The Mirror

Dalbars Quantitative Analysis Of Investor Behavior (23rd edition) is worth a read

The 24th version is out but I couldn't locate a copy

Summary of key findings

• In 2016, the average equity mutual fund investor (see definition above) under-performed the S&P 500 by a margin of 4.70%. While the broader market made incremental gains of 11.96%, the average equity investor earned only 7.26%.
• In 2016, the average fixed income mutual fund investor outperformed the Bloomberg Barclays Aggregate Bond Index by a margin of 0.19%. The broader bond market realized a slight return of 1.04%, while the average fixed income fund investor earned 1.23%.
• Equity fund retention rates decreased materially in 2016 from 4.1 years to 3.8 years.
• Fixed income fund retention rates increased by almost two months in 2016, inching up from 2.93 years to 3.09 years, eclipsing the 3-year mark for the first time since 2012.
• In 2016, the 20-year annualized S&P return was 7.68%, while the 20-year annualized return for the average equity mutual fund investor was only 4.79%; a gap of 2.89%.
• The gap between the 20-year annualized return of the average equity mutual fund investor and the 20-year annualized return of the S&P 500 narrowed from 3.52% in 2015 to 2.89% in 2016.
• In 5 out of 12 months, investors guessed right about the market direction the following month. While “guessing right” 42% of the time in 2016, the average mutual fund investor was not able to keep pace with the market, based on the actual volume and timing of fund flows.

Each Year Morningstar also publishes Mind The Gap

When it comes to investing, we are so often our own worst enemy. Countless studies have shown that we tend to chase performance: buying high, selling low, and failing to learn from our mistakes every time. This applies to individual stocks, funds, Beanie Babies, crypto-currencies, you name it.

We pay a steep price for our actions, one that can be many multiples of a commission or an annual fee. In the realm of funds, we can roughly quantify the cost of this bad behavior. For years, my colleague and Morningstar Fund Investor editor Russ Kinnel has documented this phenomenon and sized the toll it takes on investors’ returns in his annual “Mind the Gap” study

 

Yep, it's all about me as usual aka WIIFM.

 

Love Carl Richards cartoons

 

Six simple steps to improve decision-making

 

@Redwing
Thought this was really interesting and did a little Googling and found 2018.
2018 QAIB Report Advisor Edition

 

Maybe off topic somewhat.

I know others will likely disagree with me and for many it might be unachievable but being able to live comfortably off the income from the portfolio is the best thing ever from a behavioural perspective.

It frees me from the scariest aspect of investing in risk assets being volatile and sometimes violent moves in the capital value of the portfolio.

Being older and retired with no / minimum human capital left I can’t put into words how wonderful it is to be able to live of the natural yield of the portfolio. Pure bliss!

 

@Nodrog certainly an envious position to be in.

It all amounts to managing the risk of permanent loss of capital in real terms at all stages of life.

Not having to relying on capital for living expenses in retirement is a big kickstart!

Of course, for most of us, getting to that point requires mastering our own behavioural instincts to accumulate sufficient assets to support that luxury.

Accumulaters are at a disadvantage to retirees in that they can rely on neither capital nor income from investments for living. Unfortunately we only have human capital to rely on for generating income for living expenses . Oh, and time . Poor us!

 

Without stating the obvious us retirees don’t usually get to this position without having first been an accumulator.

As for permanent loss of some of our capital I’ve done that a number of times along the way in my rush to get rich quick when much younger.

And it should be noted that like a lot of people who lose money it comes as a result of being fixated on that evil thing known as CAPITAL GAINS. It seems to be at the heart of why so many investors fail or achieve a poor outcome.

Getting away from this pursuit of capital gains and turning my attention to the INCOME stream from equities was for ME (financially and behaviourally) without a doubt the main reason for our investing success.

 

Could not agree more

 

I_A, if anyone has mastered the behavioural aspects of investing it’s you.

What you been up to? Perhaps grabbing more CBA given the circumstances?

I assume you still follow Ashley Owen? I keep up to date with his latest views including this recent seminar:

 

You’re only in your 50’s aren’t you?

Spring chicken. No human capital? Pfft.

You could easily fill a book with your experiences and bits of wisdom you’ve picked up along the way.

As Charles Ellis says, the investment game is great because you can keep working until you’re in your 90s. Even though you aren’t working in the field, participating still counts. So the lessons learned along the way which have brought value to a lot of us, would also bring value to others too.

 

59 going onto 60.

I’ve lived hard. A couple of decades with way too much time in nightclubs and plenty of free booze on offer. Add industrial deafness to the list of resultant ailments, a side effect of being a drummer:



Not me but you get my meaning.

 

Haha, so by my calcs you’ve probably got 40 years left! Retiring early is guaranteed to prolong your life due to lower stress (no guarantee)

If Munger and Buffett can drink Coke and eat candy all day I think you’ll be fine. Actually, maybe that’s the secret?

 

I think Keith Richards would be a good role model for me. Aging gracefully.

Not sure if this pic is Richards or a recent pic of @SatayKing? I’ve heard only their mother could tell them apart:

 

He's me brother.

 

Twin brother from what I’ve heard given such a striking resemblance.

 

Don’t know about mastered just turn everything off and don’t listen.

CBA, Ashley would be very disappointed with me same old same old, I have diversified a bit in the last buyers’ market with WBC and MQG not to mention a few others.

They’re not stopping dividends any time soon, so I’ll hang around awhile yet, as soon as they look like a “Kodak” I find something new, probably what you do.

Ashley, has changed since looking after others money it gives a completely different outlook, but I would trust him with my money.

All the best

 

The S&P 500 dropped 4.38 % in 2018, but according to Dalbar’s research, the average investor in U.S. stock market funds lost 9.42 percent.

Why? It was apparently in large part due to investors buying high and selling low, bailing out of one fund to try and catch a ride on the current hot fund/trend, successful long term investors don't jump from fund to fund, hoping to ride on the coat tails of the next hot thing.

By dollar-cost averaging they sometimes end up paying lower than average prices over time. During a volatile period for stocks many of these successful investors outperformed their funds.

 

Easier said than done I think. The temptation to follow to try and catch the next big thing is a matter of "The Force is strong in this one!"

Takes a lot of effort for a person to ignore the exhortations to jump this way or that and plod on according to their plan. I include myself in that too as I have wavered occasionally but fortunately stopped just in time. The buy, walk away and don't bother to look until the next buy is not too bad I've found.

 

Interesting podcast on investor psychology.

Podcast #511: Mastering the Psychology of Investing | The Art of Manliness