Average investors beat Dollar Cost Averaging
This is a great breakdown of a key study used to examine investor performance vs. indexes. Are you an investor? Trader? Market timer? Buy-and-holder? Risk manager? What works best? Have a read of this article - I think it's worth your time.The average investor beat dollar cost averaging!
http://www.kitces.com/blog/archives/...uest-Post.html
Great read.
hey great topic.
sub-title is Mediocre Is the new CMF Flash Word.
it's the epic running stockpickers vs indexers debate, right, lepht ?
The conclusion I draw from the blog post you've linked here is that you cannot take DALBAR's estimation of the behaviour gap to be accurate because at least some of it can be explained by sequence of returns. You cannot conclude from either the post or the DALBAR study on average investor returns in mutual funds that the behaviour gap does not exist.
DALBAR isn't the only study on the behaviour gap. John Bogle found that this delta between investment returns and investor returns exists even in index mutual funds.
I'm personally puzzled about the behaviour gap because if mutual fund investors lose as a group (even before you account for expenses) due to their distressing habit of dumping funds after market declines and buying funds after market advances, there must be market participants who are benefiting from their mistakes. The question is who?
Canadian Capitalist -- Helping you invest & prosper
Answer is : nobody.Originally Posted by CanadianCapitalist
It is perfectly possible for all mutual fund members to not come out ahead over a period of time.
If you look at the fund as a time continuum, it is possible that over a period of years, all the participants end up underperforming the base index.
Sure, at any given specific moment of time, investor A might benefit from investor B's poor decision (to buy or sell). But next month/quarter/year, investor A makes a poor decision and loses his previous gains.
Over 5 - 10 years, nobody comes out ahead, other than the fund managers and their company (because of fees).
And, worse, this does not even begin to address the fact that all major equity indices have not been outperforming bond indices over the last ~ 10 years.
There's gotta be millions of investors that entered the markets in the late 1990s and are still down.
My guess is the hotshot active investors on this forum who are all beating the index by a wide margin.
Mike Holman
Money Smarts Blog Investing and Personal Finance
Alpha is zero sum. If someone does worse than the index, someone else has to do better, at least before costs.
Some of that alpha shows up in momentum, value investing, small caps, etc.
Also this claim:
"To its credit, the latest DALBAR study also shows investor returns of a dollar cost averaging investor. If an investor invested a fixed amount in equity funds every year, the investor return would have been 3.17% a year for 20 years, compared to the actual investor return of 3.49% a year. The average investor beat dollar cost averaging! Why isn't that the headline?"
Does this take into account what investors would have done with the money not invested in the market in the DCA scenario? Presumably not stuffed in a mattress.
Last edited by andrewf; 2012-10-03 at 11:13 AM.
This is one of the studies often cited in those discussions - yes.I'm not judging anyone's beliefs here - but I thought many here would find the article interesting no matter which side of that debate they fall on.
I think this article looks at the results from the DALBAR study from the point of view that in reality investors do not have all of the cash. In most cases we save that money and invest it gradually over time, and that behaviour is much more typical than an individual having say $ 500,000 to invest up front and hold for 20 or 30 years. I thought it was interesting to look at how that assumption of "normal" behaviour of a typical investor changed the results drastically.
I also don't discount the behaviour gap - heck much of my own trading relies on doing the opposite of the herd - but I still found value in that article.
It's pretty clear that a gap exists between fund returns and investor returns even before you take fees into account. That means some other investors or group of investors are benefiting from the investment mistakes of mutual fund investors as a group. My money on who earns alpha by taking the other side of the trade of mutual fund investors is corporate insiders both those buying/selling company stock for their own account and CFOs issuing stock at high valuations. I have seen no evidence to back up my claim. It's just speculation on my part.
Canadian Capitalist -- Helping you invest & prosper
I bet these are major factors.
I'm starting (over the past few years) to believe that most of the money is made or lost during the large events. I think it would be very telling to see where the cash was flowing between 2007-today. I would be it is exactly out of the pockets of the majority, and into the pockets of very few.
Share buybacks are actually criticized for buying at high valuations, rather than opportunistically buying when valuations fall. If you look at the buyback volume over the past few years, the peak was in 2007, and the volume of buybacks fell precipitously in the 2008 panic. Companies with strong balance sheets could have added a lot of shareholder value through buybacks (*cough* Apple *cough*).
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