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Subject:  Bond Fund Investor Stupidity Date:  1/12/2013  11:17 AM
Author:  globalist2013 Number:  34655 of 35593

Not every bond fund investor loses money over the long haul. But the Dalbar 20-year studies of investor behavior (linked below) clearly document that the average investor in fixed-income mutual funds never achieves real rate of return when even the government’s inflation numbers are subtracted, much less when taxes are paid on gains and a realistic rate of inflation is subtracted.

The quantitative analysis part of the report shows improvement of returns for investors as compared to the numbers reported in 2009, but the numbers will shock most investors. For the 20 years ending December 31, 2009, investors' annualized returns by fund type were: equity 3.17%, fixed income 1.02%, and asset allocation 2.34%. All returns are before an inflation correction of 2.80%, which leaves investors with 20 years real equity annualized return of 0.37% and negative annualized returns for fixed income of -0.78% and asset allocation -0.46%. [emphasis mine]

Why is the average bond fund investor so incompetent?

Here is a list of explanations offered by DALBAR that summarizes the reasons for the poor performance. The list draws heavily upon the behavioral research emerging science. It appeared in earlier editions of the annual QAIB report and is reproduced below.

(1) Loss Aversion: Expecting to find high returns with low risk.
(2) Narrow Framing: Making decisions without considering all implications.
(3) Anchoring: Relating to the familiar experiences, even when inappropriate.
(4) Mental Accounting: Taking undue risk in one area and avoiding rational risk in others.
(5) Diversification: Seeking to reduce risk, but simply using different sources.
(6) Herding: Copying the behavior of others even in the face of unfavorable outcomes.
(7) Regret: Treating errors of commission more seriously than errors of omission.
(8) Media Response: Tendency to react to news without reasonable examination.
(9) Optimism: Belief that good things happen to me and bad things happen to others.