Investor Behavior or Advisor Behavior -- 2009

Eighteen months ago, we published a post entitled "Investor behavior . . . or advisor behavior?" in which we pointed out that long-running research by the Dalbar, Inc. consistently demonstrates year after year that investors earn significantly less than the investment vehicles available to them.

We also pointed out that, although retail "financial advisors" tend to point to the Dalbar study as evidence that investors need professional help in order to avoid the kind of self-destructive behavior documented in those Dalbar studies, in actual fact the source of the data that Dalbar uses indicates that around 80% of the investors covered in the study seek some sort of professional advice when purchasing mutual funds outside of retirement plans at work.

In other words, the results depicted in the study and in the graph above indicate that the advisors may be as much or more of the problem than the investors themselves! We have written at some length about why this might be so, and how "intermediaries" can damage long-term wealth creation, even when their intentions are good.

The most recent Dalbar Quantitative Analysis of Investor Behavior 2009, released this past March, again confirms what previous studies have discovered. Covering a twenty-year stretch of time from the beginning of 1989 through the end of 2008, it found that the average equity investor dramatically underperformed not just "the market" (as represented by the S&P 500) but also inflation.

In the graph above, we see the results of the study: while the S&P 500 returned 8.35% annualized over those twenty years, the average equity investor earned a paltry 1.87% annualized over the same twenty years, while inflation averaged 2.89% per year.

As with previous Dalbar studies, the results are the worst for the twenty-year period -- which is especially troubling, since (as we have often pointed out) the results that matter the most to a family building wealth are the results over periods of decades, not over short periods of months or a couple of years.

We believe that the situation is even worse than the atrocious situation revealed in the Dalbar study. During 2008, many advisors recommended their clients invest in international funds, as well as investment vehicles tied to commodities indexes and foreign exchange plays, which did much worse than the US market represented by the S&P 500 in the data above. We pointed out a Wall Street Journal article which backs up that observation in a post last November. If the Dalbar study included data from bets on commodities, or bets on foreign exchange and currencies, or other exotic instruments that were recommended to investors in the name of "diversification" and "non-correlation," the results would probably be far worse.

This is a problem we have been talking about long before the most recent market panic, and which independent research has been identifying for many years. The events of 2008 should be the final wake-up call for investors that there is something seriously deficient in the existing "intermediary" model that has developed over the past twenty or thirty years in the financial services industry.

Unfortunately, just as the results of the Dalbar are often misinterpreted, it is quite possible that the damage of 2008 will be similarly misinterpreted. However, we would advise investors to return to the model which existed prior to the rise of the intermediary system, which we discuss in various places in this blog, and to tell others about it as well.

For later posts on this same subject, see also:
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