Time to Go Shopping - Global shares nosedive

Dalbar in the US recently released their 21st annual study which continues to show just how poorly investors perform on average relative to market benchmarks over time and seeks to provide explanations for that underperformance. When in theory index investing is such as simple concept.

Before costs investing is a zero sum game, after costs it is a negative sum game. Investors are subject to the impact of taxes, trading costs and investment fees. Furthermore, there are complex technical issues to do with index reconstitution that affect the long term performance of an index tracking fund over time.

However, these factors do not fully account for the relative underperformance of investors over time. The key findings of the Dalbar study show that:

  • In 2014, the average equity mutual fund investor underperformed the S&P 500 by a wide margin of 8.19%. The broader market return was more than double the average equity mutual fund investor’s return. (13.69% vs. 5.50%).
  • In 2014, the average fixed income mutual fund investor underperformed the Barclays Aggregate Bond Index by a margin of 4.81%. The broader bond market returned over five times that of the average fixed income mutual fund investor.(5.97% vs. 1.16%).
  • In 2014, the 20-year annualized S&P return was 9.85% while the 20-year annualized return for the average equity mutual fund investor was only 5.19%, a gap of 4.66%
The explanation presented for such wide discrepancies tends to be based on investor behaviour. As a group, investors tend to buy high and sell low and fail to achieve the returns that the capital markets provide to those investors who manage to stay invested through the market gyrations.

All investors need to be aware that overconfidence is an exceedingly common behavioural trait; most commentators tend to systematically overestimate their ability to accurately determine when markets are “high” or “low” compared to the evidence of their success. Levels of confidence are exacerbated during periods of persistently trending markets - upwards or downwards. Investors should watch out for making decisions when assets appear to be “obviously” over or under-valued – recent history tends to be a poor guide.

The conclusion reached by academics studying the subject is that those investors who have the benefit of working with an adviser are more objective and more disciplined than those investors who try to go it alone. In some studies investors achieve more than 100% of the returns of the funds in which they are invested by applying disciplined and objective portfolio rebalancing.

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`iam tandem', inquit, `intellegis me esse philosophum?' tum ille nimium mordaciter: `Intellexeram', inquit, `si tacuisses'.
 
Marc said:
In 2014, the 20-year annualized S&P return was 9.85% while the 20-year annualized return for the average equity mutual fund investor was only 5.19%, a gap of 4.66%
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Hi Marc

Hoc non facit sensu ad me

If a large group of people are under-performing the market by 4.66%, then some big group must be outperforming the market by this amount. Index funds under-perform slightly because of costs. I assume that Pension Funds are under-performing as well. There are very few Warren Buffets around.

Brendan
 
But Marc there's so many studies that prove everything here's a comprehensive one from Harvard Business School that's shows -

In aggregate, advised portfolios lag passive benchmarks by 2% to 3% per year, depending on the choice of benchmark. These estimates represent economically substantial underperformance: an investor who expects to retire in 30 years gives up a quarter of potential savings in present value terms by lagging the passive benchmarks by 3% per year. It is the performance drag from fees and not negative stock-picking or market-timing abilities that accounts for most of this underperformance.

The value-weighted expense ratio of the average advisor in the sample is 2.4% per year; among the top-1% of the most expensive advisors, the expense ratios reach 3.5% per year. Across advisors, we find substantial variation in investment performance, but little evidence of value added, even among the best performing advisors. The alphas in the 5th percentile of the distribution are associated with t-values below −2.5 no matter the choice of passive benchmarks. At the same time, the alphas even in the 99th percentile of the distribution are statistically insignificant. We use the Fama and French’s (2010) luck-versus-skill methodology—which they introduce to measure the proportion of skilled mutual fund managers— and find no evidence of skill (net of fees) even in the extreme right tail of the distribution.
 
Marc I read an article recently about that study, alot of food for thought. Basically the average independent investor is the worst performing of all market participants. You make a good point about needing some separation from your money, if you are in control of it there is always the pressure to do something when market turmoil happens. Whereas with a fund manager there is some seperation, also that manager invariably knows more than the average investor and is better able to hold their nerve. Even the worst funds during the financial crisis have probably done much better than the average investor who invested in bank shares then.
 
Fella

Before you continue your tirade against advisors, may I remind you that in January of this year you were posting questions on this site for example,

http://www.askaboutmoney.com/thread...or-irish-residents.188821/page-2#post-1416221

You received comprehensive responses, sometimes from qualified practitioners such as myself at no cost to you, which has enabled you to make your own investments free from some of the previous mistakes you were making.
 

Brendan

The explanation is to do with the difference between time weighted and money weighted returns.

Take an example say a Technology fund launched in the 1980s.

The brochure from the company might say that the fund has averaged a respectable 10%pa since the 1980s. And let's say that this is the true number.

Now you are an investor and you look at this performance record and decide to invest.

Now, when did most of the actual money flow into this fund? The 1990s right?

So let's say you invest in 1999 what's your return? Let's say it's -10%pa

So the fund has a performance track record of 10% pa but the average investor in the fund (when most of the money went in) achieved a negative return.

Where did it go?

Well for every stock purchase one had to be sold.

The same is true of the property market in Ireland.

The cash from overpriced property deals in 2006 went to the sellers.
 

Hi Marc

I began investing last year , like many others I was unhappy with the return on deposits in the banks so had to look elsewhere. Like a lot of Irish people my initial reaction was become a landlord buy a couple of properties and rent them out , it seemed the easiest thing to do , the stock market scared me I wanted something more tangible like a house to rent , every time I ran the numbers for property investment I was getting very low yield and it didn't seem worth it.

I then began to then look at other options , the stock market is very daunting for a new investor , a lot of information online was aimed at American or UK investors. I had some good knowledge of market efficiency but found the most complicated part of investing the tax treatment of ETF's (my chosen investment type) the tax treatment for Irish investors is/was very hard to understand , revenue have since clarified this and there has been a great deal of discussion in the threads here about it , a lot of people have contributed and its with these discussions and by debate that I feel it is much clearer now to understand and you can see a steady flow of people asking the initial questions about investing and making the move to investing from using the information available on this forum.

I have nothing against Financial Advisor's I think a lot of people will just use a Financial Advisor as they admit they are bad with money and have no interest in learning about finance , the reason I posted in this thread was because a question was put out could someone show a sample portfolio with say 100k invested and see how it gets on , I very much understand this posters question as I have been there and still am , I haven't a huge knowledge of the stock market it is very very daunting investing your hard earned money even for someone like myself who is well used to large losses. I feel your reply to his question will just put him off investing altogether , I know if I had read that before starting I probably would have just said to myself - this is too complicated lets leave it and buy a property instead.

Its very hard to disagree with the fact that most people will be better off putting a large percentage of there money into a low cost index tracker and keeping a bond allocation in equal % to the age of the client . I find your constant quoting of studies unhelpful to the average investor and off-putting to people starting out, your posting style - Do you overweight small and value stocks based on the Fama French three factor model.? You know full well from reading my posts that I wouldn't of heard of this , so why post it ? To boost your own ego?

It wasn't a tirade against financial advisors on my part , there are many studies that say a monkey and a pin would do better than a financial advisor at picking funds , I woudn't be so rude as to post them , my point was there are studies that show everything , your pointing to studies showing a financial advisor can add up to 100% return , I have merely said from my readings online the general consensus is Financial Advisors do not add value. Most of your postings and studies you post show that the investors flaws are from selling when the stocks fall, as I point out if you buy a low cost index tracker and forget it or add to it as you have the cash once you keep fees low ( which includes Advisors fees) then investing can be much simpler than people think.

Marc any post I made here people are free to reply or not , the fact I received a reply from yourself doesn't mean I owe you anything , anyone that replied to me I thanked them at the time , I received great help here and that is one of the reasons I want to help others starting off , its clear enough why someone like myself is posting on a website like askaboutmoney looking for advice whats not so clear is why someone like yourself is.
 
Thats a contradictory statement and purely for the sake of having a dig. The debate on the role of advisers is so simple as passive trackers vs advisers.
 

Hi noproblem

Colm Fagan is an active private investor and former President of the Society of Actuaries. He will be doing a monthly column in the Irish edition of the Sunday Times starting this Sunday "The Diary of a Private Investor". Although I am not a stock picker, I have discussed investment issues with Colm in the past and his approach is far more systematic, independent and critical than the stuff published by stockbrokers

Brendan
 
Hi Brendan

That’s good news – Colm has formidable pedigree so it will be interesting to see what he has to say.

My sense is that Noproblem’s idea is to understand where people think it’s a good idea to invest their money. I think it’s an idea worth developing.

So, let’s say, you had a scenario where someone has a 30 year investment horizon and has decided to invest a portion of his/her pension fund assets in equities. Let’s say, also, that this notional fund is made up of an existing sum to which regular contributions will be added. I am using this scenario as it is likely to be of interest to many who visit this site. To keep the debate on track, let’s say finally that:
  • the objective is to maximise returns for the level of risk taken;

  • ethical considerations can be parked (I struggle to understand what is and isn’t an ethical company - where the line is drawn, etc. - perhaps someone else can start another thread on this one!!); and

  • the investor is somewhat rationale – i.e. is not going to sabotage progress by engaging in all sorts of behavioural errors.
I shall now propose an investment strategy! I am not precious about this in the sense that it may well not be the optimum strategy and would love for contributors’ to explain (and ideally demonstrate) how a better outcome is likely to be achieved.

My investment is one presented by the Trustees of my pension plan – which is a passive global equity fund (partially hedged) and I am very happy with this choice.

Some quotes from Charles Ellis which may explain why I am comfortable with this investment:
  • Advice doesn't have to be complicated to be good;

  • The evidence of investment managers' success with market timing is impressive - and overwhelmingly negative; and

  • Statisticians debate amongst themselves whether it takes 40, 60 or 80 years to determine definitively where the incremental return obtained by a particular portfolio is attributable to luck or to skill.
My hope in writing this is that the folks on AAM will provide comfort for such an approach and/or suggest (and ideally demonstrate) ways where/how enhanced outcomes are likely.
 
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Article for me had just couple points worth noting
Fads and fashion drive prices
Beware Heroic assumptions
Lottery approach
 
elacsaplau said:
My investment is one presented by the Trustees of my pension plan – which is a passive global equity fund (partially hedged) and I am very happy with this choice.
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Seems like an excellent strategy. It would be interesting to see whether the financial advisers concur or would suggest other options.
 

by any historic objective measure , stock are priced on the high side right now , both in the usa and europe , while not all countries in europe have regained their historic highs , germany has more than exceeded it this year , the uk would not be expected to regain its all time highs due to the collapse in oil prices , its main index two largest components are shell and bp
 

Sorry Joe while your facts are correct you are missing something even more significant.

The FTSE100 traded over 6000 for 2 years between Feb 1999 and Feb 2001. Today it is 6,187.

galway_blow_in said:
the uk would not be expected to regain its all time highs due to the collapse in oil prices , its main index two largest components are shell and bp
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This is a very misleading thing to say. Investors in 1999 buying the FTSE didn't know they were gambling on oil prices, they thought they were buying the market. It also does not explain why over 16 years no new companies replaced oil stocks to lift the market.

The simple fact is that the second largest equity market in the world (is that still correct?) has been at a stand still for nearly 20 years.
 
thats a very good point, the main stock markets have not taken out the year 2000 highs, even the dow is not that much higher than in 2000 when it reached 14000. It could be argued that there has not been a stock market boom since the 90s as then there were many people investing in shares . However with the crash of 2001 and 2008 many people have stayed away from the stock market which meant that it has been see sawing for the last 15 years. The dow is now at 16000 even though it reached 14000 in 1999. When you compare this with the period 1990 to 2000, it rose from 2500 to 14000 in just 10 years. The mini boom from 2002 to 2007 was really a real estate boom rather than a stock market boom
 
In the US, many prospective retirees are basing their future retirement on the 4% SWR(safe withdrawal rate). The 4% is estimated to preserve the capital value and account for inflation. These calculations assume a 7-8% growth in pension index funds over time.

How does fit in with the assertions that the US stock market has been basically stagnant over 20 years past?
 
Dividends. The average yield on stocks comprising the S&P500 is currently around 2% but has been considerably higher in the past.

The safe withdrawal rate is the maximum amount, adjusted for inflation, that can be withdrawn annually from an investment portfolio over a prescribed time period before the portfolio is completely exhausted. Historically, a withdrawl rate of 4%, adjusted annually for inflation, from a balanced portfolio of stocks and bonds, has survived around 95% of rolling 30-year periods and has therefore been considered a "safe" withdrawal rate. There are many commentators that are now predicting that a balanced portfolio will not survive a withdrawal rate of 4% in the coming decades (given the current high valuations of both stocks and bonds).
 
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