DALBAR Reports Dismal Results
and Confirms Biases

Good Morning Relaxing Retirement Subscriber,

DALBAR Inc.’s 25th Annual Quantitative Analysis of Investor Behavior (QAIB) has reported dismal investor returns and confirmed multiple investor biases as the culprit.

As a refresher, DALBAR is the financial community’s leading independent expert for evaluating, auditing and rating business practices, customer performance, product quality and service.

Since 1994, DALBAR’s QAIB has measured the effects of investor decisions to buy, sell, and switch into and out of mutual funds over short and long-term timeframes.  These effects are measured from the perspective of the investor and do not represent performance of the investments themselves.

In addition to reporting that the average investor in equity mutual funds grossly underperformed the market index again in 2018, and each year over the last 30 years, here are a few other disturbing results they reported about investors in 2018:

  • The Average Equity Fund Investor (stocks) withdrew funds every month in which the S&P 500 Index had a material gain,
  • The only month the Average Equity Fund Investor made a significant contribution was a month where the S&P 500 Index lost approximately 2.5%,
  • The Average Equity Fund Investor’s performance trailed the S&P 500 Index in August when market prices soared, and in October when prices fell sharply, i.e. when market prices rose and when they fell,
  • The Average Fixed Income Fund Investor (bonds) lost 2.84% while the Bloomberg/Barclays Aggregate Bond Index gained 0.01%.

Take a moment to read those again to let them sink in.


The question we always have to ask after reading these disturbing results is why?

Why do the investment results of the average investor so drastically trail the most basic index of broad stock and bond market returns year after year?

The only two logical possibilities are:

  • the fees they paid, which ate into their returns, and
  • “how” they invested, i.e. when they bought, when they sold, what they chased, what they were scared out of, etc., i.e. their investing behavior.

We’re going to closely examine these root causes over the coming weeks so we can help you avoid these horrific results and close this gap!

Investor Biases

When we closely examine investors, as I have for decades, there are several biases that they bring to the investing table each day which drive their investing behavior.  And, this is what leads to the horrific results reported by DALBAR.

  • Recency Bias: The first of those is Recency Bias, i.e. mistaking recent events for ongoing “trends,” and thus repositioning your investments accordingly in order to take advantage of your “hunch.”

    This is a challenging one to navigate because we all want to believe that there is a direct correlation between what just happened and what will now happen next.

    Think back to the end of 2018. From September 26th through Christmas Eve, stock market prices fell almost 20%.  Believing that was a “trend”, millions of Americans sold over $100 billion of equity mutual funds over a two week period.

    Once again, however, there was no correlation for what was to happen next as market prices fully recovered from December 26th through the end of the first quarter of 2019.

    Unfortunately, as Warren Buffet stated: “investors project out into the future what they have most recently been seeing.”

  • Endowment Effect Bias: Another one is what is known as the Endowment Effect Bias which occurs when investors place greater value on something they already own, i.e. they are very subjective.

    They begin the process by justifying what they have done up until now, and focus on what they already own as the starting point.  This information is of value when trying to understand the mindset behind prior decisions.  But, it is of no value when objectively evaluating and designing an effective investment mix to achieve long term future goals

    .A great question to ask if you find yourself engaging in this behavior is, “if you didn’t already own what you currently own, and all of your money was in cash, would you go out and buy the exact investments in the exact same quantities as you currently hold them?”

    When asked that way, most instinctively respond “no”.

    If that is true, then the follow-up question is, “why do you continue to own what you own?”

    I know these are tough questions because they challenge our current way of thinking.  However, they’re incredibly important to your long-term investment results, and thus your level of financial freedom.

  • Confirmation Bias: Another destructive investor bias, closely related to this, is known as Confirmation Bias which occurs when you seek information that confirms your own preconceptions and beliefs.

    What this leads to is avoiding, undervaluing, and even disregarding anything that conflicts with your preconceived beliefs.  Ultimately, it closes your mind to what could very well be the truth, and thus a valuable solution for you.

    We’re all guilty of this to some degree in all facets of life.  We all like to watch the news stations that slant in the direction which we identify with.

    The danger when investing is that this bias shuts off your ability to objectively evaluate your past decisions, and thus your results.  I see this all the time when folks spend wasted energy and time trying to justify and defend their past choices and decisions.

Let’s continue next week by revealing more investor biases, and how you can resist the temptation to follow the crowd and engage in these lines of thinking.

Committed To Your Relaxing Retirement,

Jack Phelps
The Retirement Coach

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(The content of this letter does not constitute a tax opinion. Always consult with a competent tax professional service provider for advice on tax matters specific to your situation.)