How did the average do-it-yourself investor fare last year? Dalbar, Inc knows!

First, a look back at 2021 investment environment in the United States. It was another impactful year for many events, predictable and seriously improbable:

• Covid pandemic diminishing, although uncertainty remained when its variants surfaced

• With the recession waning, vacillating decisions to return to work environments from working-at-home impacted employment

• As businesses gradually reopened, a shortage of workers developed due in part to the “great resignation” phenomenon that saw an estimated 47 million individuals leave the workforce

• Active capital markets saw equity valuations height-zooming, attributable somewhat to influx of massive numbers of new investors

• Supply-chain disruptions, higher costs, and escalating oil prices impacted everyday consumers’ budgets

• Corporate business remained solid, despite the increasing costs and disruptions

• Inflation began climbing to the highest level in decades

• Most improbable of all, the deliberate attempt to overthrow the democratic republic of the United States, stunned the world. The appallingly sad, fatal episode, was a failed attempt that did not deter carrying on the most important business of government for the people.

Capitalism, all the while, in the global investment community continued trading, negotiating deals, conducting business, and moving money, services, and products, because commerce has a life of its own.

Here, readers sometimes question why I write about the United States environment.

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Investment comparisons.pdf

Reasons

One, we are tiny mirror image, almost, of our larger neighbour.

Two, it may surprise some to realise that significant percentages of their Bermuda National Pension Scheme, the Bermuda civil service Superannuation Fund, and the Contributory Pension (Social Insurance) Fund are invested in varying percentages of US securities.

Three, our local banks and investment firms offer choices of US investment vehicles, for example: mutual funds, exchange-traded funds, money market funds, single securities and more for the DIY investors and managed portfolios.

And, this is where individual investor behaviour becomes a never-ending fascinating topic to all financial professionals and investors themselves.

Dalbar has the factual statistics from tracking investor behaviours for almost 30 years. Based in the United States and Canada, Dalbar is regarded as a leading independent expert for evaluating, auditing, and rating business practices, customer performance, product quality and service.

Launched in 1976, Dalbar has earned the recognition for consistent and unbiased evaluations of investment companies, registered investment advisers, insurance companies, broker/dealers, retirement plan providers and financial professionals.

Since 1994, the Quantitative Analysis of Investor Behaviour (QAIB) has measured the effects of investor decisions to buy, sell and switch into and out of mutual funds over short and long-term time frames.

These effects are measured from the perspective of the investor and do not represent the performance of the investments themselves.

Dalbar provides significant factual statistics as to how market crises resolved in the past, how investors tend to react to volatility, and offering calming perspectives in order to understand logical investment reasoning instead of reactive financial behaviour.

The goal of QAIB is to improve performance of both independent investors and financial advisors by managing behaviours that cause investors to act imprudently by offering guidance on how and where investor behaviours can be improved.

Dalbar data is derived from multiple sources: Investment Company Institute, Standard & Poor’s, Bloomberg Barclays Indices, and proprietary sources all provide content.

This 28th annual QAIB report examines real investor returns from 1985 through the end of 2021, including major investment events such as:

• The 1987 crash

• The 1990s bull market

• The market drop at the turn of the millennium

• The 2008 market crash

• The recovery periods leading up to the most recent bull market

• The unprecedented events of 2020.

Dalbar’s results consistently show that the average investor earns less – in many cases, much less – than mutual fund performance reports would suggest.

The chart shown indicates that for the entire Dalbar tracking time frame of almost 30 years, the average investor has never outperformed the equity and/or bond index.

Why? Consistently, the individual investor trips up, succumbing to poor decision making to some or all of nine major investor behaviours, among them:

• Loss aversion - expecting to find high returns with low risk

• Not diversifying adequately to reduce risk

• Reacting to melodramatic media news without reasonable independent research

• Following the herd mentality to invest, without understanding the investment or possible results

• Optimism: only good things happen – it’s the other investors who take losses.

These vacillating emotions lead to low retention rates in the market as investors trip in and out of investments, reacting irrationally based on good and bad news, low or high anxiety, rather than factual analysis, thereby, not remaining invested in markets long enough to realise the benefits of time in playing the long game.

Dalbar provides a simple example of a buy-and-hold investor versus the average fund investor. See the chart attached as a PDF under the heading of “Related Media”.

Buy-and-hold investor: $100,000 is invested for the full year 2021 and at December 31, 2021, the buy-and-hold investor’s S&P 500 equity portfolio earned $28,705.

Average fund investor: same amount invested $100,000, same S&P equity portfolio, but there is time in and out of the market during the year. At year end, the investments earned $17,950 — almost $11,000 less than the buy-and-hold investor – just in one year.

Keep in mind these analyses and results apply to average investors in mutual fund products, although there are numerous accounts of relatively the same results for individual securities investing.

The old truism “time in the market beats timing the market” still has tremendous validity!

Buy and hold – leveraging the long investment game is again verified!

More on this and related asset allocation in next month’s investor series articles.

Full Dalbar reports are available at https://www.dalbar.com/

Disclaimer: this article is for general information only and is not intended, nor can it be used for personal investment advice to buy, sell securities or any investment vehicle.

• Martha Harris Myron is a native Bermudian with US connections. Amazon / Apple published author of Dawn of New Beginnings, Book One of The Bermuda Islander Financial Planning Primers, and a Google News Contributor