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URL:  http://boards.fool.com/persistent-fixed-income-under-performance-30428115.aspx

Subject:  Persistent, Fixed-income Under-performance? Date:  12/12/2012  1:00 PM
Author:  trader2012 Number:  34550 of 35344

DALBAR tracks investor results and calcualtes annualized returns. Below is a reproduction of a chart that appears in the 2012 edition.

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Avg Avg
Equity Fixed-income Barclay's
Investor SP500 Investor Aggregate
20yr 3.5 7.8 0.9 6.5
10yr 2.4 2.9 0.9 5.8
5yr -2.2 -0.3 1.0 6.5
3yr 12.6 14.1 4.1 6.8
1yr -5.7 2.1 1.3 7.8
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That equities --on average -- offer less return than fixed-income instruments is to be expected. (Stocks are far riskier than bonds.) But the percentage differences by which each group under-performed their relevant benchmarks are surprising. Over the past 20 years, the SP500 -- a common benchmark of stock investing performance-- offered an annualized 7.8%. But the average stock investor achieved an annualized performance of 3.5%, or only 45% of what they could have achieved if they had done nothing more imaginative than index their investments. Said another way, they under-performed their benchmark by 55%. But fixed-income investors, on average, did far worse. They achieved only 14% of what their relevant benchmark offered, or an under-performance of roughly 86%.

Why do ‘average, fixed-income investors’ under-perform their benchmark so egregiously?

My guess --and this is just a guess-- is that FI investors aren’t dumber than stock investors, nor any less well-trained than stock investors, nor any more disadvantaged by the structure of their chosen markets. Instead, my guess is they are spending their income-streams as they receive them, and they are not putting that cash back to work, whereas stock-investors --typically-- are rolling their gains forward. Hence, their achieved returns are greater, because they aren't "taking money off the table" to the extent that FI investors are. That’s the only explanation I can come up with for the huge under-performance discrepancy of FI investors compared to their stock-investing counterparts.

What still does need to be explained, however, is why both groups under-perform their respective benchmarks by such wide margins.

Why aren’t 'average investors' indexing more of their investment money? In other words, "if you can't beat 'em, why not join 'em"? Currently, there are just over 200 bond ETFs, lots of closed-end ETFs, and beaucoup open-end, fixed-income, mutual funds. Let's apply an aggressive filter to those three groups and say that 90% of them are either redundant or pointless. That still leaves several dozen that have merit.

Which, then, are the few worth looking at, no matter that this might not be the most advantageous time to be averaging into them?

That's a clear-cut research problem, right? and a good one to spend some time on before year's end.

Charlie
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