Are individual investors really this bad?

[Gone Fishing]

http://www.businessinsider.com/typical-investor-returns-20-years-2014-8

Sorry if this has already been posted but it really shocked me.

[surfhb]

Doesn't surprise me at all.     My parents money ( and my inheritance) disappear starting in 2001 and finally in 2008.   

[BooksAreNerdy]

It shocks me that the average investor would basically do better by sticking cash under the mattress. Wow.

[wtjbatman]

It shocks me that the average investor would basically do better by sticking cash under the mattress. Wow.

Have you even met people? How many people do you hear talking about buying gold (Why? When? Who knows, it's gold, buy some), or investing in real estate (What kind and at what leverage? Who cares, they aren't making any more land), or saying that saving money in the stock market is the equivalent of throwing your money away.

And I don't know if this counts as being an "individual investor", but as we know at most jobs nowadays the employer starts a 401k contribution automatically (good) once the employee is eligible. Sometimes the contribution defaults into a money market fund until you pick your investments (bad), and people will just let it sit there losing value to inflation.

Many people are just shockingly uneducated about the best way to invest their own money.

[LAWson]

People easily get swayed by price action and let their emotions control their decisions. In a world of abundant information, most "investors" still limit themselves to hot tips and any other get-rich-quick ideas. I know engineers who think that chart patterns tell the future, so imagine the majority involved in markets!

[beltim]

Interestingly, unlike professional fund managers, individual investor performance is at least somewhat predictive of future investor performance:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1004454

So if you're a bad investor now, you're likely to be a bad investor in the future too.

[Eric]

It shocks me that the average investor would basically do better by sticking cash under the mattress. Wow.

Have you even met people?

LOL!

[Dicey]

This is why I gladly pay someone else to manage my money. I had earned a black belt in saving, and an irrational fear of investing. Maybe it wasn't so irrational after all, based on this.
Mine is a minority position around here, but my returns have far exceeded what I would have done on my own, which makes me both happy and FIRE. 

[Kaspian]

Investors are that bad.  Even us diligent index investors can be pretty bad.  Bogle dislikes ETFs, arguing that the ease of trading (over regular mutual funds) encourages people to self-sabotage by chasing gains, increasing trades, and trying to time markets.  He's proven that if we left it well enough alone, the majority of us would be far better off in the long run.

I'm learning to not see my investments as money any more--just a mathematical formula which occasionally gets out of whack.  Automatic deposit, deposit, deposit, deposit...  Oh, it's January--rebalance!  Automatic deposit, deposit, deposit.. Oh it's July already?!  Rebalance.  [Repeat for the next 9 years.]

[Scandium]

Also interesting; hedge funds underperformed the S&P. Is that before or after the 2%/20% fee..?

[Magclaw]

Investors are that bad.  Even us diligent index investors can be pretty bad.  Bogle dislikes ETFs, arguing that the ease of trading (over regular mutual funds) encourages people to self-sabotage by chasing gains, increasing trades, and trying to time markets.  He's proven that if we left it well enough alone, the majority of us would be far better off in the long run.

I'm learning to not see my investments as money any more--just a mathematical formula which occasionally gets out of whack.  Automatic deposit, deposit, deposit, deposit...  Oh, it's January--rebalance!  Automatic deposit, deposit, deposit.. Oh it's July already?!  Rebalance.  [Repeat for the next 9 years.]

If bogle dislikes ETFs, where does he recommend putting the money?

[hodedofome]

Yes, people suffer from cognitive biases. It causes them to buy at the top and sell at the bottom. Wall Street's job is to take money out of your pocket and put it into their pocket. They do a pretty good job of it too.

And don't think that professional managers don't suffer from the same biases as individuals.

[nordlead]

Bogle dislikes ETFs, arguing that the ease of trading (over regular mutual funds) .

If bogle dislikes ETFs, where does he recommend putting the money?

mutual funds, as noted above.

Both can be passivly managed index funds, but VTSAX is a mutual fund, and VTI is an ETF. Both track the same index and both have the same fees.

[MooseOutFront]

This is why I gladly pay someone else to manage my money. I had earned a black belt in saving, and an irrational fear of investing. Maybe it wasn't so irrational after all, based on this.
Mine is a minority position around here, but my returns have far exceeded what I would have done on my own, which makes me both happy and FIRE.

I sent this article to my father just to show him how bad the average investor is.  He's at Edward Jones now and up to this point buys what "his guy" tells him to.  It did cross my mind that this article actually supports him paying an advisor.  Even Edward Jones loaded fund crap likely beat the "average investor."  I'm still trying to get him into simple Vanguard funds with future investments, but I realize a big part of my responsibility here is to make him aware of the phycology of it all.  Otherwise it's leading wolves to the slaughter.

[Bob W]

Why yes they are.  Remember, the average Joe doesn't have any investment training.   I would guest that less than 3 % if people have a clue. 

 As a rule people buy and sell stocks emotionally.    I do too,  when I feel really bad about the market and worry,  I buy the shit out of it.  When I feel like its a party and I'm getting rich,  maybe it is time to sell?    Best time to buy is when there is blood in the streets.   Best time to sell is when your barber is giving you stock tips. 

[pdxbator]

This doesn't surprise me at all. A colleague of mine who I sometimes discuss investment strategies with did this. About 1.5 years ago he was scared about how the market was. He is a doomsday-er thinking the worst in everything. So he converted all his 401k holdings to a money market (essentially earning nothing). He's lost out on all the phenomenal gains since then. You can't time the market.

[Jack]

Interestingly, unlike professional fund managers, individual investor performance is at least somewhat predictive of future investor performance:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1004454

So if you're a bad investor now, you're likely to be a bad investor in the future too.

Interesting! So you could just go find yourself a bad individual investor, then do the opposite of whatever they do...

(I'm at least 50% joking, by the way.)

[beltim]

Interestingly, unlike professional fund managers, individual investor performance is at least somewhat predictive of future investor performance:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1004454

So if you're a bad investor now, you're likely to be a bad investor in the future too.

Interesting! So you could just go find yourself a bad individual investor, then do the opposite of whatever they do...

(I'm at least 50% joking, by the way.)

Better to find a good individual investor and copy them, unless the bad investor you copy consistently loses more annually than the market returns.

(I'm at least 50% serious, by the way)

[t-rymz]

Target date retirement funds. All the way.

[johnny847]

Target date retirement funds. All the way.

They're a great option for people who don't want to have to do any rebalancing and exercise tax efficient allocation of funds. However, for people who are willing to put in that effort, target date funds are inefficient in taxable accounts because they have bond interest, which is always taxed at your marginal rate. Also, it's harder to tax loss harvest with a target date fund, because if stocks were to crash and bonds don't, you can tax loss harvest your stocks and sell some bonds to buy stocks, but with a target date fund, you wouldn't be able to do that.

But all of this is a balance between increasing your after tax return and effort put in to maintaining your portfolio. For me, I think it's worth the extra time. But I understand for some it will not be.

[arebelspy]

The problem with data like this is that everyone thinks they're above average (and those who don't already invest in index funds).

So you can't use this data to convince an investor, because they know they're smarter than the average investor.  ;)

[Beric01]

The problem with data like this is that everyone thinks they're above average (and those who don't already invest in index funds).

So you can't use this data to convince an investor, because they know they're smarter than the average investor.  ;)

This is so true. The way to go about it is not to base it on the average investor, but the very best. When you show that even the very best investors can't beat the market, and you have to be Warren Buffet, then you have a more convincing argument.

The average investor probably IS an above average person, as many poor people aren't investing due to lack to capital.

[beltim]

The problem with data like this is that everyone thinks they're above average (and those who don't already invest in index funds).

So you can't use this data to convince an investor, because they know they're smarter than the average investor.  ;)

This is so true. The way to go about it is not to base it on the average investor, but the very best. When you show that even the very best investors can't beat the market, and you have to be Warren Buffet, then you have a more convincing argument.

The average investor probably IS an above average person, as many poor people aren't investing due to lack to capital.

But that's not true for individual investors.  The top 20-25% of individual investors outperform the market even after fees (see above link and http://www.psychologytoday.com/files/attachments/5123/sept-2005-distributed-version.pdf)

[Beric01]

The problem with data like this is that everyone thinks they're above average (and those who don't already invest in index funds).

So you can't use this data to convince an investor, because they know they're smarter than the average investor.  ;)

This is so true. The way to go about it is not to base it on the average investor, but the very best. When you show that even the very best investors can't beat the market, and you have to be Warren Buffet, then you have a more convincing argument.

The average investor probably IS an above average person, as many poor people aren't investing due to lack to capital.

But that's not true for individual investors.  The top 20-25% of individual investors outperform the market even after fees (see above link and http://www.psychologytoday.com/files/attachments/5123/sept-2005-distributed-version.pdf)

After fees and taxes? I'd have to pull up the Bogleheads Guide to Investing again to get the specifics, but it made the point that even those who beat the market usually go back under when accounting for taxes.

[beltim]

But that's not true for individual investors.  The top 20-25% of individual investors outperform the market even after fees (see above link and http://www.psychologytoday.com/files/attachments/5123/sept-2005-distributed-version.pdf)

After fees and taxes? I'd have to pull up the Bogleheads Guide to Investing again to get the specifics, but it made the point that even those who beat the market usually go back under when accounting for taxes.

Those two articles I cited don't take taxes into account, but of course that's not necessary if we're discussing a tax-advantaged account.

[arebelspy]

But that's not true for individual investors.  The top 20-25% of individual investors outperform the market even after fees (see above link and http://www.psychologytoday.com/files/attachments/5123/sept-2005-distributed-version.pdf)

On what timeframe?  Having 20-25% beat an average (when, logically, 50% should beat the "average" by definition) is pretty poor.

Over a short timeframe many ought to outperform due to random chance.  Over a long time period, say 30+ years?  Good luck with that.

[beltim]

But that's not true for individual investors.  The top 20-25% of individual investors outperform the market even after fees (see above link and http://www.psychologytoday.com/files/attachments/5123/sept-2005-distributed-version.pdf)

On what timeframe?  Having 20-25% beat an average (when, logically, 50% should beat the "average" by definition) is pretty poor.

Over a short timeframe many ought to outperform due to random chance.  Over a long time period, say 30+ years?  Good luck with that.

That article looks at up to 3 years of performance persistence.  But the really cool thing is that unlike professional managers, individuals who have outperformed in the past are more likely to outperform in the future.  It's a really interesting read, especially in contrast to the literature on fund managers.

[Mr Mark]

As a 'class'  of investors, small private investors are known to have biases.

they track momentum more than they should, they do ...

http://www.dailyfinance.com/2010/12/05/10-mistakes-investors-make/

  lots of things they shouldn't.  I don't think many would disagreewith that. The thing is, your behavior 'in aggregate' as a small private stock trader is... predictable. And predictability in this environment is a killer.

This means you get exploited by the quants, who deliberately look for these effects and trade against you. Powered by massive computing power and PhD mathematical gurus, all competeing against each other... you are the grist to their mill.

Buy the market at the lowest cost. Relax. But to imagine you can beat these guys is like someone who claims to beat the real casino. Selective memory and survival bias.

Just my humble observation.


YMMV

[tyler1215]

The problem with data like this is that everyone thinks they're above average (and those who don't already invest in index funds).

So you can't use this data to convince an investor, because they know they're smarter than the average investor.  ;)

We're not all above average?! Did they look at investors from Lake Wobegon?

[Jellyfish]

The problem with data like this is that everyone thinks they're above average (and those who don't already invest in index funds).

So you can't use this data to convince an investor, because they know they're smarter than the average investor.  ;)

We're not all above average?! Did they look at investors from Lake Wobegon?

HA! Was totally thinking that as I read arebelspy's post. 

[larmando]

Interestingly, unlike professional fund managers, individual investor performance is at least somewhat predictive of future investor performance:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1004454

So if you're a bad investor now, you're likely to be a bad investor in the future too.

How very consoling! :)

[foobar]

http://www.kitces.com/blog/does-the-dalbar-study-grossly-overstate-the-behavior-gap-guest-post/


Summation: That report doesn't mean what you think it means.