No. of Recommendations: 2
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.

What could be done to correct this problem of under-performance?

The simplest solution --and the one that Dalbar self-servingly suggests-- is that those “average” investors ought admit their persistent incompetence and find a financial advisor. But it can be inferred from Dalbar's own numbers that advised money offers only marginally better returns, instead of the market-beating, index-beating returns that that most investors need if they aren’t to suffer poverty in retirement. Obviously, “most” investors can’t be better than average. But a determined few could be, and the characteristics needed to achieve that superior performance have studied in detail by Schwager and others. If you’re not already part of the market-beaters club -- but want to become a member -- you’ll figure out how to benefit from the easily found research, which comes down to two things:

- A passion for the game
- A commensurate work ethic.

In short, those who do well like what they're doing. They've found an investing/trading game for themselves that exactly matches their temperament and personality, and then they stick to their plan.

Here's an 11-minute summary of Jack's original 53-minute lecture (that seems to have been pulled from YouTube)
Here's a 5-minute snippet from a longer talk by Linda Raschke.
Here's a 6-minute video by Van Tharp on personality

In all of those talks, feel free to substitute to term 'investor' for 'trader' for there being no material difference in terms of how both have to identify and manage their risks. What you will notice, however, is that all three talks emphasize the same things of matching your system to who you are, and the huge amount of work that has to be done to achieve success. That is why the "average" investor fails. (1) They're trying to borrow someone else's system --generally the garbage known as 'Modern Portfolio Theory' [sic]. (2) They are skimping on the time that achieving investing success requires. If you're willing to work "40 for the man", you ought be wiling to work "at least 4 for yourself". There's a whole bunch of investing things that can't be done successfully by putting in just 4 hours per week. OTOH, there are some games that can be found if that's all the time you have. So find an investing/trading game that is within your means and resources, and then go for it with as if you really do intend to win.


Print the post Back To Top
No. of Recommendations: 3
A passion for the game

You can stop right there for 95% of the populace. Just a guess but an overwhelming majority likely don't have a passion for it and don't see it as a game.

- A commensurate work ethic.

Not quite the same percentage but even more than 95% when you consider they have to also have a passion for the game.

at least 4 for yourself

You are asking too much. Seriously. More time is spent each week on Facebook.
Print the post Back To Top
No. of Recommendations: 4

But take a step back and review what has happened in this country since the late '70s and the passage of ERISA. Most workers used to be able to count on a Defined Benefits pension upon retirement. What are the numbers these days of those who are eligible? Most DB plans have been converted to Defined Contribution plans, and the typical structure and match for those plans is pretty crappy. Most workers need not only capture whatever match might be available to them and shelter whatever wages they can, but contribute the max to an IRA each year. In other words, between the enforced savings of paying SSI and Medicare taxes, most workers also need to be saving the max allowed by 401k/403b plans and the max allowed for yearly IRA contributions, or a savings rate in the neighborhood of 20% to 25%, not the 3% to 5% commonly reported as the median savings rate. Then, having gathered those assets, they need to put them to work.

You're right. Most aren't going to save or invest, and they will have to work until they die, or they will depend on the government to keep them from starving. So their choice is simple. They can fiddle and play all summer of their lives, as the grasshopper does in the folk tale, or they can work and harvest like the ant, so they can get themselves through the coming winter of their later years.

I've been a worker. I put myself through collage working 70-80 hours a week in the summer. I raised a family on hours of work that often went to 12 hours days, 7 days a week. The last thing anyone in those circumstances wants to do when he comes home is another 2 to 4 managing money. But that second job has to be done, and done well. The average work-week in this county is less than 40. Commute time adds a lot of hours. But it's a rare person who can't find four hours a week to manage their money. That they choose not to find those hours, or use them effectively, is going to cause them grief down the road. The often suggested workaround is "find an adviser". But their track records, as Dalbar reports, is pretty crappy, too. In most cases, the potentially best manager is the owner of those assets.

For the most part, poverty is a choice in which one has no good choices, for having squandered one's assets and opportunities. That poverty isn't necessary. Dollars could be saved and invested. Whether the saving and investing is considered a 'noble' activity, or merely the gambling game that it really is, makes no difference in terms of potential final results. But the latter is the far more effective approach. People understand games. People play games, and they don't mind the back and forth of win and lose. Investing is a game that can be won, but it can't be won without loses. The thought of having to accept those losses in order to get to the wins is what panics people. So they try to manage risk by avoiding it, and they end up losing big anyway. But if money is going to be lost no matter what, why not turn those losses into lessons that can improve one's game? Pick a sport, any sport. It doesn't matter. No one slams home runs the first time at bat. No one pulls consistent money out of markets on ten minutes of instruction or practice. That's just not enough time to gain the experience that leads to good judgment. Even 4 hours/week isn't enough unless the effort is consistent and it represents many, many years of 4 hours/week. Then, the payoffs begin to happen.

I know I'm a driven person. I did my first stock trade when I was ten. What kid do you know today who is reading the financial pages because he finds the numbers interesting? But investing was part of family life in my house. My blue-collar, not college-educated parents were old-fashioned patriots whose love for their country was expressed by being fractional owners of its companies. For birthdays, we were given stock shares. When the quarterly dividends came, we were escorted down to the bank where those dividends were deposited in a passbook savings account. "Thrift-saving-investing" was what we kids saw in our house, and it's what we continued into our adult lives. That model isn't unrealistic, and it needs to be replicated far more widely.

Print the post Back To Top
No. of Recommendations: 1
But take a step back and review what has happened in this country since the late '70s and the passage of ERISA.

And now we have rules that allow employers to automatically enroll people in their 401k - and more often than not in target date funds.

The often suggested workaround is "find an adviser"

I see people every day that make absolutely horrible financial decisions and using an advisor would at least get them to stop making horrible decisions, even if the new decisions they make are not the absolute best.

Perfect is the enemy of good.
Print the post Back To Top
No. of Recommendations: 1

I know I'm a driven person

dude you are only typing well on a keyboard most of the time.

you are not Rembrandt or Mozart......ya know?

My mother was more driven than you and in Ireland in her day they had very few cars.....

The real word for your 'driven' is motivated.....only slobs with the language use the word driven.....

UFB.....we aint all that and a bag of chips......

Print the post Back To Top
No. of Recommendations: 0
I see people every day that make absolutely horrible financial decisions and using an adviser would at least get them to stop making horrible decisions, even if the new decisions they make are not the absolute best.


You're merely echoing what Dalbar themselves discovered, that advised money typically did better than self-directed money.

But read the report and look carefully at the numbers. The difference is very slight, not even half the improvement one would expect, nor one tenth of what those advisees need. In other words, self-directed or advised, both groups --on average-- failed to achieve their benchmarks. All introducing an advisers into their decision-making did was allow chronic losers to have someone to blame for their own stupidity.

Yeah. "In the land of the blind, the one-eyed man is king." But having two eyes and using them effectively is preferable. Not "perfect', but certainly preferable.

Again, step back and look at the "ecology" of investing. Wall Street doesn't want informed, effective investors, nor do the public schools, nor, really, does the SEC, nor the mutual fund companies. So what you see is by intent. The foxes and wolves like things just as they are, with plenty of stupid investors from whom to pluck fees.

Print the post Back To Top