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Weekend reading: The average investor is apparently awful

Weekend reading: The average investor is apparently awful post image

What caught my eye this week.

I can’t really believe the chart below from JP Morgan that circulated around financial Twitter this week.

US investors are seemingly so prone to woefully bad attempts to time markets and other kinds of trading mishaps that they earned just 2.9% annualized over the past two decades:

Source: Alan Smith

That’s barely ahead of cash.

Hey, Mr Average Investor

Reading the small print reveals the graph is based on data from Dalbar Inc. That company’s work has foregrounded the so-called ‘behaviour gap’ for many years.

The behaviour gap describes how poor active choices by investors – such as trying to time markets, or to chase hot investments – means that most ultimately receive a far lower return than the broad asset class data implies.

The Dalbar study is also subject to regular debunking. I’m not even sure where we are with that right now. But JP Morgan apparently believes Dalbar is still credible.

Or maybe JP Morgan has something to sell. Unfortunately I don’t have access to more than that screenshot, so I can’t give you its official pitch. Perhaps it’s taken from Why You Should Entrust All Your Money To Us To Manage, Mortals, where it’s presented as evidence? Who knows.

What I can say is that if the average investor in conventional assets has really seen just a 2.9% return over 20 years, then you can see why so many of them chased rock JPGs and SPACs and GameStop at the height of the bull market in 2021.

I mean, what did they have to lose?

(Okay, apparently 2.9% a year.)

We can do better guys! Read my co-blogger The Accumulator and do as he does. Or do as our model passive portfolio does. That’s nearly 9% a year over the past 11 years, with just a handful of trades per quarter.

Or invest in an all-in-one index fund. Anything but 2.9% a year.

Have a great weekend all!

From Monevator

FX fees on investments, and how to crush them – Monevator

Mortgage risk: a checklist – Monevator

From the archive-ator: Are you richer than your kids, or poorer than your grandkids? – Monevator


Note: Some links are Google search results – in PC/desktop view you can click to read the piece without being a paid subscriber. Try privacy/incognito mode to avoid cookies. Consider subscribing if you read them a lot!1

UK interest on debt payments hits record £7.6bn in May – Guardian

While inflation now at 9.1% as prices rise at fastest rate in 40 years… – BBC

…leading shoppers to set a £30 limit at the till and other behaviour changes – BBC

…and sinking UK consumer confidence to a record low – EuroNews

Payment Systems Regulator to investigate post-Brexit card fees – PSR

Bank of England withdraws mortgage affordability stress test – Reuters

Ray Dalio says stagflation is coming – Institutional Investor

Fear of death tends to decline with time, and other interesting findings on aging – AARP

Brexit gonna Brexit mini-special

A candid assessment of Brexit from a Leave voter, six years on – The Independent

The deafening silence over Brexit’s economic fallout [Search result]FT

LSE: Brexit hit UK’s competitiveness, reduced productivity, and lowered Brits’ real wages – CityAM

The Brexit dividend will be higher inflation risk for years to come – Bloomberg

Products and services

Cheapest mortgage deals revealed as rates continue to rise – Which

Nationwide revives 5% rate on [limited] current account balance, plus cash bribe – ThisIsMoney

Open an account with InvestEngine via our affiliate link and get £25 when you invest at least £100 (new customers only, T&Cs apply) – InvestEngine

100 98 days left to use your £20 and £50 banknotes – Bank of England

Ten-year fixed-rate mortgages now ‘incredible value’ – Guardian

Beware the new ATM scam where crooks can steal your card details in minutes – ThisIsMoney

Topsy-turvy homes for sale, in pictures – Guardian

Comment and opinion

Where does the wealth go when asset prices drop? – Noahpinion

Volatility in your pension isn’t the risk you should worry about – Financial Bodyguard

10 years of fake retirement later – Financial Samurai

Former Tory minister calls 10% rise in state pension ‘ludicrous’ – Guardian

So bad it’s good: three reasons to be bullish… – LPL Research

…and six more things that might go right – Validea

Rising interest rates are ending an era where the rich got much, much richer – The Atlantic

12 paradoxes of investing – Humble Dollar

How exposed is the UK as inflation spirals the cost of government borrowing? – Proactive Investors

Reverse-engineering the path to making $1 million a year – Banker on FIRE

10 years of leisure wrested from The Man – Simple Living in Somerset

Think outside the portfolio – Of Dollars and Data

Rental houses versus stock market investments – Mr Money Mustache

The billionaire investors bickering show is back [Podcast]All-In

Larry Swedroe: how to use and not abuse the Shiller CAPE ratio – TEBI

Bear markets are a test of investor emotions – Behavioural Investment

The eye of the storm – Young Money

Bond bust mini-special

When bonds do not hedge stocks [US but relevant]Morningstar

Has the bond crash done enough to make them attractive again? – Institutional Investor

Are TIPS broken? [US but relevant]Eversight Wealth

Crypt o’ crypto

Bitcoin whale Michael Saylor urges governments to regulate crypto’s “parade of horribles”Yahoo

First short Bitcoin ETF listed on the NYSE – Coindesk

Naughty corner: Active antics

Managing a SIPP in drawdown: 10-year update – DIY Investor UK

A summary of High Returns for Low Risk by Pim Van Vliet – Novel Investor

Should you buy Rio Tinto for its 17% dividend yield? – UK Dividend Investor

An interview with thoughtful active investor Guy Spier [Podcast] – I.C. via Youtube

And with Mohnish Pabrai, with lots on Charlie Munger [Podcast, forgot to link last week]TIP

In quarantine

Covid rates continue to rise; one in 35 had it last week – BBC

Polio virus detected in London sewage samples – BBC

How the monkeypox epidemic is likely to play out, in four graphs – The Conversation

Vaccine Damage Payment Scheme: the battle for compensation – BBC

Kindle book bargains

Find Your Voice: The Secret to Talking with Confidence by Caroline Goyder – £0.99 on Kindle

Ultralearning by Scott Young – £0.99 on Kindle

The Dealmaker: Lesson’s From a Life in Private Equity by Guy Hands – £0.99 on Kindle

Think Like A Rocket Scientist by Ozan Varol – £0.99 on Kindle

Environmental factors

A floating city in the Maldives begins to take shape – CNN

Wet Wipe island has “changed the course of the Thames” – via Twitter

UK chemicals plant ready to start carbon capture rollout – Guardian

Controversy grows over whether Mars samples endanger Earth – Scientific American

French and Belgians eating wild frogs to extinction – Guardian

Off our beat

Inside the secret, often bizarre world that decides what porn you see [Search result]FT

A brief history of the shipping container – Hakai Magazine

Experience: I lost my eyesight overnight – Guardian

Amazon readies Alexa to mimic a deceased loved one’s voice – Gizmodo

The summer of a thousand goodbyes – Finding Joy

‘Mid-century millennial’: the ubiquitous look of a generation’s homes – Guardian

Over half of Africa’s young adults want to emigrate – Quartz Africa

And finally…

“The more we tie our happiness to things that we cannot control, the more we subject ourselves to the negative volatility of the outside world. Therefore, we need to be mindful in setting our goals.”
– Vitaliy Katsenelson, Soul in the Game

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{ 22 comments… add one }
  • 1 Marco June 25, 2022, 7:40 am

    A lot of those bad investors also will invest in stuff that can’t be tracked like Buttcoin.

  • 2 HariSeldon June 25, 2022, 8:21 am

    Curious that MSCI show returns from 2001 to 2022 for Emerging Markets has being 9.9% in the article chart, yet I find MSCI quoting annualised net returns from 29th Dec 2000 to May 31st 2022 as being 8.16%…..

    I must agree that meeting an “average investor” would be interesting…


  • 3 Foxy June 25, 2022, 8:38 am

    > Where does the wealth go when asset prices drop?

    This is not intuitive, but I was surprised to hear Josh from the Compound with >20 years of industry experience arguing wealth HAS to flow to money market funds or somewhere.

    Obviously, Batnick is correct here. Wealth just evaporates.

    Maldives floating city? I thought “they’re not making land anymore”!

  • 4 Gentleman's Family Finances June 25, 2022, 8:55 am

    I did some analysis of my SIPPs performance over the last 10 years or so.
    I was a bit disappointed with an XIRR of 7.5% or so based on today’s prices.
    Now that is more than 2.9% and more than cash or inflation but not a stellar result.
    I try to keep is simple, safely with low cost ETFs (but didn’t always) but I was expecting more.
    Non pension investments are a bit riskier for me and the returns have been better but that’s luck (?)

    So maybe the best way to make your money grow is to have the best career, pension (the return on salary sacrifice for example can be massive), tax planning, getting on your feet first by buying a house instead of renting or moving to get a better job or never paying off the mortgage but investing instead.

    I’m not totally happy with 7.5% and can see how gambling on meme stocks or crypto is enticing.
    I’m happier to get rich slowly because it’s painfully obvious that most “investors” in these things end up contributing to the gains of others.

  • 5 platformer June 25, 2022, 2:07 pm

    The slide is taken from JPM’s quarterly ‘Guide to the Markets’ (2Q 22, p63):

    There is a UK version too. It’s a (very good) data dump more than a sales doc.

  • 6 The Investor June 25, 2022, 2:58 pm

    @HariSeldon — I think you’re looking at different time periods, just eye-balling the graphic?

    @Marco — Hmm, I suppose it depends on their methodology. But the last time I tried to understand the pros and cons of the Dalbar study I did a combination of brain over-heating while slipping into a coma, so I won’t try again…

    @Foxy — It’s hard to imagine that floating city being very sustainable. How do they manage sewage etc? But then looking at Male today (capital of the Maldives) that’s seems a bit of a ‘mare anyway. We need far fewer people, and those against a falling global population need to think harder IMHO.

    @GFF — Well 7.5% is between 2-3 times what the average investor is apparently getting, according to this document. I imagine you have had excessive home bias in the past few years maybe? That could be reversing. Who knows — we’re getting into the speculation that clearly impairs most private portfolios (and which yes I do indulge in heavily with my own dime, but I don’t think most people should!)

    @platformer — Thanks, that’s very handy 🙂

  • 7 xeny June 25, 2022, 3:50 pm

    @GFF – I’ve always worked on the basis that my pensions are the longest duration investments I have, so they’ve always had the riskiest (highest equity%) assets in there. Yes, it’s my _pension_, but it had a good long time to bounce around before I’ll be able to access it.

    Investments outside pensions I may need to tap in a shorter timeframe, so that’s where I’m less likely to be 100% equities.

  • 8 Greg June 25, 2022, 4:26 pm

    A few days ago I actually thought of this behavioral gap and that my personal performance is most likely in no way what the markets returned. But to some (most?) extent that is just down to life, i.e. at times I had more free cash flow for share buying and at other times I didn’t. In my view that’s not market timing but just life – but of course it’s also an involuntary market timing if you like

    – bought and renovated a house – no surplus cash to buy ETF (at least in meaningful sums)
    – bought a bunch of bonds last year to get back to 70/30 as our portfolio balance was out of whack and it made me feel uneasy
    – going back to Uni – money spent on tuition and not on ETF
    – bought a bunch of ETF in 2018 in a time that, purely from memory, was somehow a plateau, but before that bought some real estate and didn’t have cash

    So yes, my performance wasn’t great overall – then again in terms of overall net worth it’s all been good so this is more an interesting thought, than a “i messed up” and I’m not closely tracking.

    And while I’m here – huge thanks for the consistently great content on here! I think I started to read this page ca. 2012 when I graduated Uni and I come back weekly…it’s been a very good 10 years for me and this page definitely helped for the financial part 🙂

  • 9 David June 25, 2022, 6:06 pm

    The average investor (if such a person actually exists) would only have buy at the top of the market and then panic and sell at the bottom of the market e.g with the financial crisis and covid to deliver a low return. If you add to this buying into fads and over hyped opportunities and you have the potential for poor performance. If you panicked and sold at the bottom, when would you buy again? Perhaps you wouldn’t and leave your money on deposit or would you buy when you thought that share prices had recovered, but when is that?
    Easy to say but harder to do: diversify, keep costs low and sit on your hands.
    PS love this blog

  • 10 Fatbritabroad June 25, 2022, 7:20 pm

    The Irony of an article about watching porn just above one about losing your eyesight. Bravo if this was deliberate 😉

  • 11 Pinkney June 25, 2022, 10:31 pm

    High borrowing costs, high inflation, strikes, brexit trade woes, increases in taxes, flights cancelled, govt sleaze, nhs under pressure, and now a lack of frogs legs for sure its looking a bit grim up north in the uk. Time to retire to the garden and catch some rays and have a cuppa listening to test match special and relax.

  • 12 Naeclue June 25, 2022, 10:50 pm

    The results from the Dalbar report chimes with personal experience I have witnessed with friends and family. Most investors still invest with active fund managers or through wealth managers such as SJP. This puts them at an immediate disadvantage, regardless of any pointless tinkering they get up to.

    Simple message – if you want better than average returns 1) buy and hold a cheap world tracker through the ups and downs of the market, 2) rebalance annually with your cash or bond fund. That’s all you have to do. Why so many people don’t get it is mystifying. Human nature seems to get in the way.

    The fund management industry and finance media (apart from this site) don’t help much either.

  • 13 ZXSpectrum48k June 26, 2022, 11:13 am

    The JPAM analyst who put that slide together should be shot. You cannot compare a the market return over a specified horizon with an incorrectly (dollar cost) averaged return over the same period. Apples vs. rotten oranges. You pay peanuts .. you get Dalbar!

    If you correctly time weight, you find a much smaller relative performance gaps vs market indices such as the S&P. Some studies based on periods from 1990-2010 showed around 1.5-2%. The last one I bothered to read (from Morningstar I think) was probably 7 years ago and the gap had shrunk to around 0.5%. Most of the gap is simply fees. As fees shrunk, so did the gap. Yes, a bit of “buy high, sell low” poor active trading did damage returns, but don’t overestimate the aggregate impact of that.

    Once you move away from relative performance, however, there are outright performance gaps due to behavourial trends. One of the clearest is the pro-cyclical nature of retail investors deployment of capital. Retail investors invest more at the top of the economic cycle for the obvious reason that if the economy is doing well, they tend to be getting paid better, feel more secure in their job and have more disposable income. Plus assets are typically producing great returns. It’s all makes them less risk averse. Conversely, at the bottom of the cycle, with the economy tanking, their job at risk, and asset prices dumping, they have less money to invest and feel less secure investing. They stay in cash etc. So the structural bias is to dollar cost average more at the top and less at the bottom, leading to underperformance.

    I’ve seen the opposite of this personally as I have a counter-cyclical bonus profile: I tend to get bigger bonuses in high volatility periods. So 2008 was a great year and I got paid more in early 2009. Similarly March 2020. In both cases I invested more simply because I had more to invest. It happened to be the local base. Better to be lucky than smart etc.

    The key takeaway is probably just to keep investing and see the crashes as more opportunities than disasters. Easier said than done though.

  • 14 Seeking Fire June 26, 2022, 2:53 pm

    I read the article by Sean O’Grady and think you need to get another job. You are admitting that what you wrote six years ago about something critical was basically drivel. It was obvious to me then that economically Brexit was going to be negative for the UK, regardless of the sovereignty / political issues and that in order to make it work we would as a country need to roll our sleeves up and redesign our economy away from the single market. None of that I felt the UK electorate had any appetite for. It probably won’t unless the wheels properly fall off and harship necessitates change. We are human after all – nothing special about the British. All of which has turned out to be correct. The bit I hadn’t appreciated properly was the NI issue – happy to put my hands up to that. At the very least it’s a good reason to not pay much attention to mass media. Keep bringing this up – the deafening silence from those who wittered on about how it would be economically good is amusing & annoying. They should never ever (step forward David Davis) have any credibility again.

    Like the ermine article / rant – found myself agreeing with a lot of that.

    I don’t think $TIPS are broken at all – holders / commentators are just better informed about the components that can drive their price. Given their fall they should be a better investment from here on in compared to say a year ago as well.

    As the article & naeclue say – global tracker, buy monthly and forget is probably the best growth investment for most people long term.

  • 15 hosimpson June 26, 2022, 6:08 pm

    “Unfortunately I don’t have access to more than that screenshot, so I can’t give you its official pitch.”

    This looks like a variation of Elyse Ausenbaugh’s Feb’22 article, and the pitch is please please please dear investor think twice before withdrawing FUM from our funds now that there’s been a dip in the markets. Keep your money invested with us, the markets will recover. 😉


  • 16 The Investor June 26, 2022, 10:33 pm

    @SeekingFire — “I read the article by Sean O’Grady and think you need to get another job. You are admitting that what you wrote six years ago about something critical was basically drivel.” Um, I don’t think you mean me, but confused by some of your second-person pronouns here. 🙂

    I agree the economics editor of The Independent shouldn’t be shocked by the long-term economics of Brexit, even if it was fair enough to judge some of the apocalyptic instant doom and gloom to be wide of the market. However personally I applaud the guy for coming out and saying he was wrong. If everyone who voted Brexit for economic reasons did that, maybe we’d have some chance of fixing the worst of the damage, although as that would bring us back into conflict with free movement again it would hardly be plain sailing.

    The current sinking administration is obviously going in the other direction while it can, taking us out of the European Court of Human Rights etc. Is that really what moderate Tories wanted six years ago, pre- the campaign? Of course not.

    Let 17,410,742 million mea culpas bloom.

  • 17 Andrew June 27, 2022, 9:55 am

    I keep plugging away at my Vanguard Life-strategies. The problem is bonds have done so bad they are dragging everything down…However I shouldn’t really look at it and accept the pound cost averaging.

    It seems to any reasoned analysis Brexit will help the UK economy over time once we have reduced the unnecessary burden of regulation.

    My main worry is I think we are heading for some catastrophic events. ( ?War, ?nuclear war, ?large scale world population shifts) I suppose our money will be the least of our worries then.

  • 18 xeny June 27, 2022, 10:41 am

    @Andrew -17
    Are you saying that any analysis that doesn’t conclude Brexit will help the UK economy is unreasoned? If so I suspect you’re asking to have a lot of analysts coming after you with reasoned pitchforks.
    Given the Minister for Brexit Opportunities is crowd sourcing ideas for unnecessary regulations, I suspect they’re not as easy to find as you suppose.

  • 19 Seeking Fire June 27, 2022, 10:55 am

    @Investor. Correct absolutely not a dig at you.

  • 20 The Investor June 27, 2022, 4:02 pm

    It seems to any reasoned analysis Brexit will help the UK economy over time once we have reduced the unnecessary burden of regulation.

    There is hardly any reasoned analysis that suggests Brexit will help the UK economy over time. There are a couple of fringe economists whose predictions have so far failed to come true.

    All mainstream economists expect Brexit to slow down the UK economy a little, indefinitely. That seems to be what’s happening.

    It’s extremely unlikely that reducing regulations will offset the continued relentless friction on trade UNLESS they’re really big rollbacks (e.g allowing companies to pollute more, or slashing workers rights) which could well constrain our access to big markets (such as the EU) who would reject goods produced in such a way, not least to be fair to their own producers.

    Here’s a trivial example just from my feed today:

    I’m waiting at customs in Heathrow, having paid £700 to get our equipment in & out of the country. We are off to Italy. Before Brexit there was no charge & no customs delay

    A real world example of Brexit making things more expensive, inefficient, difficult & less enjoyable.


    The only benefit I can see that we’ve got from this is technically full sovereignty (I’d argue reduced soft power in practice), and an end to free movement if you wanted that.

    Big economic benefits versus our great deal in the EU are pie in the sky.

  • 21 Getting Minted June 28, 2022, 11:01 am

    The Dalbar report gives us a usefully low benchmark to beat. Searching on Dalbar 2020 QAIB report pdf gave me the most recent of their reports that is available free online. It gives a 20 year annualised return to 31 December 2019 of 4.25% for the “average” equity fund investor, compared to 6.06% for the S&P 500 US index. I calculated a 6.32% annualised return for my portfolio over those years. One of the few periods when I narrowly beat the US market, and definitely not average.

  • 22 Naeclue June 28, 2022, 2:55 pm

    @Getting minted, thanks for the prompt. I had not realised old Dalbar reports were available online for free, I have managed to find one that gives data up until the end of 2020 (21 years worth of data).

    I have looked at Pfau’s criticism and although I have huge respect for him I think he is focussing on a minor detail here. Yes the Dalbar report provides time waited returns over dollar weighted. However, they also provide monthly returns. Taking the arithmetic average of those monthly returns shows the Average Equity Mutual Fund Investor underperforming the S&P 500 by 0.15% per month (arithmetic average), or 1.95% annualised. That compares with a difference of 2.05% with the time weighted returns over that period, so hardly detracting from Dalbar’s key message that the “Average Investor” underperforms the market.

    I would also take issue with Pfau’s implicit assumption that Dalbar’s “Average Investor” is an accumulating one and so dollar weighted comparison’s should be used. The Average Investor is a combination of accumulators, decumulators and everything in between. Who is to say whether time or dollar weighted returns are more appropriate? Most likely neither of them are in which case taking arithmetic averages of monthly returns seems most appropriate.

    That doesn’t mean to say I don’t have issues with some of the calculations in the Dalbar report. Eg their calculation of Cost Basis strikes me as a little odd. Might be ok, but a little justification would be helpful.

    One thing for sure, if the Dalbar report is showing how investor behaviour is detracting from returns and I am still unsure of that (have doubts about the whole approach), the message is not getting through! Here are the differences in performance between the Dalbar Average Investor and the S&P 500 for years 2000 to 2020 (positive means S&P outperformed):

    2000 1.09%
    2001 3.02%
    2002 -0.25%
    2003 -1.40%
    2004 -1.72%
    2005 -3.54%
    2006 1.14%
    2007 -1.84%
    2008 4.62%
    2009 -4.86%
    2010 0.93%
    2011 7.83%
    2012 0.38%
    2013 6.71%
    2014 8.21%
    2015 3.65%
    2016 4.73%
    2017 1.12%
    2018 5.04%
    2019 5.35%
    2020 1.31%

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