To Succeed, Investors Need to Learn
By Roger Nusbaum AdvisorShares ETF Strategist
The Mathematical Investor blog recapped the results from the latest DALBAR survey which reports how well investors do by owning mutual funds compared to simply holding an index fund no matter what happens in the market (the implication is that this is about behavioral flaws that cause people to panic sell or panic buy) and the results continue to not be very good.
Investors have averaged an annualized 5.02% for the last 20 years compared to 9.22% for S&P 500 index funds.
There are at least two messages here. One has to do with investors needing to take the time to understand how behavioral finance works in general then to gain some self-awareness of the particular cognitive errors they are most likely to make (for example an investor is unlikely to both invest too rashly and at the same time suffer from analysis-paralysis).
The DALBAR results can’t only be behavioral. Some amount of the lag, perhaps unquantifiable, comes from investors having to pay for life events but most is likely from mistakes that investors make and that some investors even repeat.
Another message here is about simplicity in portfolio construction. This history of this blog of course is that I am a big believer in ETFs as being a meaningful part of the solution.
Seeking Alpha comments notwithstanding, it is very unlikely that a given investor will beat the market over long periods of time but of course with an adequate savings rate, suitable asset allocation and the self-awareness to recognize behavioral vulnerabilities an investor can have financial-plan success.
While most of this is ground we have covered before lately the idea of being eager to continue learning has also come into the conversation.
Regardless of what direction you think interest rates are headed, after five+ years of historically low interest rates the fixed income market has become more complicated than it was during the thirty-whatever-year declining rate era. If you think rates are going higher then you need to figure out how to protect your portfolio and seek alternatives like maybe liquid alternatives (on this blog we used to just call them diversifiers). If you think rates are going to stay where they are or go lower then you need to figure out how to generate yield from the part of the portfolio.
Both require the willingness/eagerness to keep learning. While this trait can help with healthy and successful aging it is also necessary for both individual investors as well as financial professionals.