Why Investors Are Still Their Own Worst Enemies
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1.  About the Dalbar Investor Behavior Studies

2.  Dalbar’s Latest Investor Behavior Study

3.  The Overriding Lesson to be Learned Here

4.  How to Avoid Becoming a “Dalbar Statistic”

5.  The Birth of Our AdvisorLink® Program

6.  Hard to Admit We’re Not Experts at This

7.  Conclusions – What to Do Now


They say that the definition of insanity is doing the same thing over and over but expecting different results. Today, I’m going to talk about something pretty close to that. Specifically, we’ll discuss a series of long-term studies that consistently show how investors do not get market-rate returns because of emotional trading. Yet the recommended solution is always the same. It’s time to challenge Wall Street’s conventional wisdom and learn how to stop making emotional investment decisions.

Dalbar, Inc., a leading market research firm, studies investor behavior each year and calculates the performance of average investors versus the returns of the major market indexes. Over the 20 years ended 2012, the S&P 500 Index delivered an annualized return of 8.21%, whereas the average investor in stock mutual funds earned only 4.25% annualized over the same period. You read that right. Due largely to jumping in and out of the market at bad times, the average mutual fund investor made only about half of what the market delivered. For bond mutual fund investors, the results are even worse over the last 20 years.

Today we’ll look at the latest Dalbar study which was released in April and shows us – once again – that most investors are still their own worst enemies. Dalbar argues that stock and bond investors should stick to a strict “buy-and-hold” strategy and should never get out. We, on the other hand, have long argued that most investors don’t have the temperament to hang on during bear markets and are very likely to bail out at the worst times.

I write about the Dalbar studies every couple of years, and the results are always the same. Average investors in mutual funds significantly under-perform the major market indexes. As we go along today, you’ll see the reasons why the study’s results are so consistent and why Dalbar’s recommended solution hasn’t changed investor behavior in over 20 years. Let’s get started.

About the Dalbar Investor Behavior Studies

Boston-based Dalbar, Inc. has been studying investor behavior (among other things) since the late 1970s. One of their early missions was to measure how average investor returns compare to the performance of the major market indexes such as the S&P 500, the Barclay’s Aggregate Bond, etc. Dalbar is the leading research firm in this area.

Dalbar calculates average investors’ returns in mutual funds by analyzing Investment Company Institute (ICI) data showing weekly and monthly inflows and outflows of money from domestic stock and bond mutual funds.

I first ran across the Dalbar studies in 1994. At the time, we were exclusively in the commodity futures fund business. That first Dalbar study I read showed that the average investor in stock mutual funds had made less than half of what the average stock fund had delivered. Dalbar noted that the poor investor performance was largely due to getting in and out of the market at bad times and frequent switching among funds, often buying high and selling low.

I remember thinking at the time, “How silly is this?” My clientele at the time consisted of a couple of thousand high net worth individuals that had invested in my futures funds. Surely, I thought, my clients aren’t making these kinds of mistakes. In any event, I wrote about the Dalbar studies in my newsletter.

We received hundreds of responses from my clients, and the message was the same: “That Dalbar study is about ME!” It was clear that many of my clients were making the same mistakes as the average investor in the Dalbar studies with regard to their mutual fund investments. My immediate thought was, I need to help these folks get better returns.

Dalbar’s Latest Investor Behavior Study

Dalbar’s annual report is called the “Quantitative Analysis of Investor Behavior.” The latest QAIB report was released in April, and the results are once again consistent with prior reports. Here are the results for the 20 years ended in 2012:

S&P 500 Index
Annualized Return
Average Equity Fund Investor
Annualized Return
8.21% 4.25%

As you can see, the average equity mutual fund investor earned about half of what the S&P 500 delivered over the last 20 years. This was due to frequent switching among funds (buying high and selling low) and being in and out of the market at the wrong times.

I mentioned earlier that the results for bond mutual funds are even worse than those for stock funds. Remember that bonds have been in a spectacular bull market for the last 30 years. How could average investors not have cleaned up in this environment? Here are the numbers:

Barclay’s Aggregate Bond
Index Annualized Return
Average Bond Fund Investor
Annualized Return
6.34% 0.98%

Bonds have been in arguably the most powerful and long-lasting bull market in history since the early 1980s when interest rates were at record high levels. Today, rates are at or near the lowest levels in history. Bond fund investors should be sitting on record profits. Yet on average, they have not even kept up with inflation – not anywhere close!

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

The Overriding Lesson to be Learned Here

Dalbar’s mission over the years has always been consistent: to help investors achieve returns that are more in-line with what the major market indexes deliver. The question has always been, how do you do that? Dalbar’s advice has always been the same: Pick good mutual funds and basically never sell them. Ride them through thick and thin.

However, the more things change, the more they stay the same. This year's Dalbar report shows that investors are suffering the same fate as when we first wrote about them back in the mid-1990s. That’s because investors let their emotions run away with them when losses occur, as well as when they think of getting out of or back into the market. And they are always chasing the latest “hot” funds to switch into.

Dalbar’s facts are correct as always, but we believe their ideas on how to fix the problem are unrealistic because of the effect of investor emotions. Dalbar recommends that investors “just say no” to their emotional desire to jump from one investment to another. Why is their advice impractical? Well, just look at the fact that the Dalbar studies have shown very similar results since the mid-1990s when I first found them. If it’s so easy to override your emotions, shouldn't investors have learned this by now?

The truth is that we can’t just turn off the switch to our emotions, which is why most mutual fund investors continue to trail the stock and bond indexes. From the start, we didn’t agree that buying and holding was the optimum solution. That requires investors to totally ignore their emotions during losing periods.

However, timing the market on your own isn’t a solution either, since Dalbar's findings show that most investors are lousy market timers. So what’s the solution?

How to Avoid Becoming a “Dalbar Statistic”

Our conclusions after seeing the Dalbar studies were entirely different. While we agreed with Dalbar that frequent switching among funds was not a good idea, and that average investors are usually terrible at market timing, we disagreed about the solution to this problem.

While Dalbar maintains that a buy-and-hold approach is the only solution, we have long argued that most investors do not have the patience and willpower to hang on during big bear markets. And because they don’t have that willpower, they are likely to bail out at the worst possible times (ie – near the bottom).

Thus, we approached the problem of frequent switching from the standpoint of how to take emotions out of the equation. We believe the best way to do that is to hire professional money managers who have: 1) a non-emotional, proven investment strategy; and 2) an actual track record showing the ability to actively manage a portfolio to minimize the effects of major corrections and bear markets.

Some people call such strategies “market timing” while others call them “active” or “tactical” management. It doesn't matter what you call it; the important part is that using professionals to manage the risks in your portfolio allows you to remove your emotions from the investment decision-making process and get on with other things you’d like to do in your life.

Likewise, we believe that most investors are ill-prepared to know when to switch from one investment to another. We know that investors are likely to make an emotional decision to switch from a fund that they feel is under-performing into the latest “hot” fund with the best short-term performance, but then that fund can often go cold. I call it the Mutual Fund Merry Go-Round. 

This is precisely why we made it our business to find professional money managers with proven systems to determine when one should be in or out of the market, and where to invest when it’s time to be in the market. We do not believe that most investors have the willpower to endure buy-and-hold and its periodic large bear market losses.

The Birth of Our AdvisorLink® Program

Once we landed on a strategy to eliminate emotional trading, I explained to my clientele that we could help them find professional money managers who have successful records of managing the risks of being in the market. This type of active management strategy has the potential to pick the right investments to be in, but also determine when to be in the market and when to move to the sidelines (money market) during bear markets. The response from our clients was incredible!

However, we also knew that finding successful money managers was not easy. Most active managers, we learned, were not successful and others had only “hypothetical” track records, not real historical trading.  Yet, if you’re willing to spend enough money and do enough searching, there are indeed some successful active managers out there, fortunately.

In 1995, we formed ProFutures Capital Management, Inc. (later re-named Halbert Wealth Management, Inc.) and registered with the SEC as an Investment Advisor. We also developed and registered the AdvisorLink® name for our new service. Ever since then we have continuously searched for successful active managers to recommend to our clients.

Over the years, we have enhanced the AdvisorLink® Program in a number of ways. First, we have broadened the mix of investments used from exclusively mutual funds to include exchange-traded funds (ETFs), as well as individual stocks and bonds. We have money managers whose strategies that range from conservative to moderate to aggressive, in some cases.

And we’ve continuously followed the yearly Dalbar studies, which have shown very consistent results ever since then.

Hard to Admit We’re Not Experts at This

We all want to be investment experts. We all want to be the captain of our own ship and make all of our own decisions about how and where to invest our hard-earned money. But the fact is that most of us aren’t wired that way. Like it or not, most of us can’t keep our emotions out of investing, especially in bear markets.

I know this first-hand. In the early 1980s, I designed a managed futures trading system and it had a great record based on “back-testing.” A lot of clients subscribed. In the first two years, it performed extremely well. New clients kept subscribing. But in the third year, it lost 30%. I was devastated! I couldn’t stop thinking about those clients who had only been in that third year.

It was a career crossroad for me. On the one hand, if I averaged all three years, the overall record was still pretty darned attractive. Maybe I should continue. But what I could not get out of my mind was the fact that some clients had only come in for that third year when my system lost 30%. I could not get that thought out of my mind.

That’s when I decided to see if there were professional commodity trading advisors out there with better track records than my own. It didn’t take too much work to find out that there were other managers that had done better than I had. That was the moment for me.

The decision for me came fairly easily. After some thought, I decided to put my ego away and focus on finding professional managers with proven track records to recommend to my clients. I’ve been doing just that for almost 30 years now.

Individual stock and bond investors face the same dilemma. Do they keep managing their own investments, even though their results have been less than acceptable? Or do they reach the decision to hand it over to professionals with proven records like those in our AdvisorLink® Program?

I think it comes down to ego. In my own case, it was a no-brainer. As soon as I realized that there were professionals that had delivered results better than my own, my ego went in the trash can. I was done. And I have never looked back since.

Conclusions – What to Do Now

If the Dalbar studies are accurate, and we think they are, there are probably millions of investors who are seeing the new “record” stock market prices as being a siren call to enter the market. Maybe you are among them.  My advice is that, if you enter the market, do so carefully.

Why?  Because it is well known that some of the largest flows of money into the stock market occurred in the first quarter of 2000, just before the bottom fell out. After witnessing years of double-digit returns in the stock market, many investors decided to go ahead and jump into stocks back then, just as the bear market began. It’s likely that many of these same investors are still under water. And the stock market looks just as tempting today.

The Dalbar studies have consistently shown that average investors earn about half of what the markets have delivered for the last 20+ years, in the stock markets, and even less in the bond markets. If we look at the Dalbar studies honestly, this should not come as a big surprise to most of us.

The primary reason for this under-performance is the fact that we can’t separate our own emotions from the investment decision process. We are constantly searching for the latest “hot” funds, even though we know we shouldn’t. We can’t ride out severe bear markets, even though Dalbar and others say that’s exactly what we should do.

We don’t build most of our net worth from our investment prowess. No, most of us have built our net worth from success in our careers over many years. So why would we assume that we can be successful investors on a part-time basis? That’s a big mistake, in my opinion.

It remains my strong opinion that we are better served to rely on finding professional money managers to oversee most of our investments and get our own emotions out of the decisions.

Is it a perfect solution? No. Money managers come and go. You have to make changes from time to time, but not often.

The point is, we as investors don’t have the determination or discipline to ride out 30%, 40% or 50% losses in our investment portfolios, as Dalbar suggests we do. That’s just a fact. If we rely on our emotions, we are doomed to under-performance. Dalbar is right-on in that respect.

So what do we do? Some of both. You should have a certain portion of your portfolio in buy-and-hold strategies. But more importantly, you should have a portion of your portfolio with professional money managers that have a proven system to get you out of the market – or hedge long positions – during bear markets and significant downward corrections.

At Halbert Wealth Management, we are dedicated to finding and evaluating professional money managers – that’s all we do. We have successful money managers who use actively managed buy-and-hold strategies, as well as managers who use sophisticated tactical strategies. We also manage clients’ entire portfolios, including tax-qualified plans such as IRAs.

If you agree that you need to enhance your portfolio with actively managed strategies, I invite you to give one of our Investment Consultants a call at 800-348-3601 to discuss all of the options available to you.

Our Investment Consultants are on salary (not commission), and they will be happy to give you an objective evaluation and make recommendations if needed. There is no cost or obligation and never any pressure. Whether you need advice on a single investment or your entire portfolio, our experienced Investment Consultants will help you select professional money managers who can take the emotions out of your investment decisions. Don’t be a Dalbar statistic any longer. We can help.

WEBINAR Reminder – May 16, 2:00 Eastern Time

With the stock market at record highs, is now a good time to invest? If so, where? Learn the answers to these questions and more in our next webinar featuring YCG Investments.  YCG’s Portfolio Managers – Brian Yacktman and Will Kruger – will discuss their investment philosophy as well as their bottom-up, fundamental approach to active money management. There will also be plenty of time for live questions after the presentation.

The webinar will be this Thursday, May16 at 2:00 PM Eastern Time (11:00 AM Pacific). Click HERE to register for this live event. If you’re even thinking about getting back into the market, you need to see this webinar first. We will record the webinar and you can watch it at your convenience on our website if you cannot make it on Thursday.

Personal Note: Our First College Graduate

Our son graduated from college on Saturday. It was such a treat for Debi and me, his Grandmother and a host of relatives and friends! He graduated summa cum laude with a degree in Engineering. He has been accepted to graduate school on a full-ride scholarship where he will pursue a Master’s Degree starting in the fall. We are so proud of him!

All the best,

Gary D. Halbert


"Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc. are not affiliated with nor do they endorse, sponsor or recommend any product or service advertised herein, unless otherwise specifically noted."

Forecasts & Trends is published by ProFutures, Inc., and Gary D. Halbert is the editor of this publication. Information contained herein is taken from sources believed to be reliable, but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgment of Gary D. Halbert and may change at any time without written notice, and ProFutures assumes no duty to update you regarding any changes. Market opinions contained herein are intended as general observations and are not intended as specific investment advice. Any references to products offered by Halbert Wealth Management are not a solicitation for any investment. Such offer or solicitation can only be made by way of Halbert Wealth Management’s Form ADV Part II, complete disclosures regarding the product and otherwise in accordance with applicable securities laws. Readers are urged to check with their investment counselors and review all disclosures before making a decision to invest. This electronic newsletter does not constitute an offer of sales of any securities. Gary D. Halbert, ProFutures, Inc. and all affiliated companies, InvestorsInsight, their officers, directors and/or employees may or may not have investments in markets or programs mentioned herein. Securities trading is speculative and involves the potential loss of investment. Past results are not necessarily indicative of future results.

Posted 05-14-2013 5:54 PM by Gary D. Halbert
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