What We Can Learn From the 2012 Dalbar Report

As you’ve heard me report before, there’s a financial research firm located here in Boston by the name of DALBAR. And, every year, DALBAR performs a quantitative analysis of investor behavior and results in contrast to the performance of markets.

Their findings are extremely important, and there’s a lot we can learn from them, so I wanted to share them with you today.

Unfortunately, the results revealed in the newest 2012 version continue to illustrate a very disturbing reality.

Here’s what the report revealed for last year, i.e. 2011:

  • The S&P 500 Stock Market Index earned 2.12% (including dividends reinvested) in 2011
  • Over the same twelve month period, the return of the “average” investor who invested in the stock market (not an investment, but an investor, i.e. a person) was -5.73%.

If you add that up, you’ll note that the difference between what the broad market provided and the average investor earned was 7.85% in one year.

Beginning with a nice round number of $1 million of investments, the difference is a shortfall of $78,500!

20 Years: 1992 – 2011

However, anyone can have a bad year and this is too small of sample size, so Dalbar also presented their findings for the last 20 years ending on December 31, 2011:

  • The Average annual return of the S&P 500 Stock Market Index from 1992 – 2011 was 7.81% (including dividends reinvested)
  • However, the average annual return of the “average” equity investor (not an investment, but an investor, i.e. a person) over the same 20 year period was 3.49%

The difference is 4.32% each and every year for 20 years!

In short, the average investor earned less than half what markets provided!

What an incredibly sad statistic.

The big question is WHY? If markets provided 7.81%, you’d think the average investor would at least earn that.

But, sadly, they didn’t. And, the reason they didn’t is because of something they “did” or “didn’t do” to mess up a perfectly good thing! (We’re going to get to examples of those shortly).

What you can’t help but take away from the DALBAR Report is that, while it makes all the news, markets (or bad investments) are not our biggest problem.

The BIGGEST problem is investor behavior, which is driven by their “strategy”, or in most cases, their default strategy which is emotion based.

Forget for a moment about trying to “beat the market” which is what everybody talks about, and talk shows are built on.

The average equity investor earned 55% less each and every year than the S&P 500 market index (a market barometer of “average” returns, not above average!)

Think about that for a moment. Something that we can all control is what our biggest problem is.

It’s uncomfortable, but it’s the only logical and rational conclusion we can reach given the findings in this DALBAR report. What else could possibly explain the massive difference in real life returns that people receive?

So, our job together is to first determine what everyone is doing wrong so we don’t fall down the same path they do.

In upcoming blog entries and articles, we’re going to closely examine what those mistakes are and outline exactly how to correct them.

Stay tuned.

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