Mistaking Noise for Signals


Most investors are so consistently wrong that merely avoiding major mistakes is enough to earn you investment returns much higher than the average investor receives.

We’ve been following data produced by Dalbar, a US-based research firm, for many years. Dalbar releases an annual report studying the behaviour of US investors in managed funds.  It’s a useful report due to the depth of data they analyse, and the results undoubtedly reflect the same human behaviours in Australia.

Over the past 5, 10, 20 and 30 years, the average managed fund investor has underperformed the markets for both shares and bonds.  Bond investors have also generally failed to keep up with inflation, meaning the purchasing power of their money has gone backwards.

The graph below shows the Dalbar results for the average investor versus the market over the 1, 10- and 30-year period to 31 December 2018.


Source: The New York Times

Whilst the one-year results are poor, we prefer to focus on longer-term outcomes as these are more meaningful, so we’ll just comment on the 10- and 30-year results.

Over the past 30 years, the average investor in a bond (or fixed interest) fund earned 0.26% pa annualised, compared with annual inflation of 2.49% pa.  So over the course of one generation, the average investor’s money went backwards by over 2% per annum. This means the purchasing power of their money decreased by almost 50% over 30 years.

What did the bond market return over this 30 year period? The benchmark Bloomberg-Barclays Aggregate Bond Index returned 6.1% pa annualised, meaning if an investor had simply owned the market, they would have 5.5 times more money. 

But the average bond investor did not do that. 

How about investors in share funds?  Over 10 years they underperformed the market by 3.4% pa, and over 30 years they underperformed by 5.9% pa.

This means after 10 years the average stock investor is worth 26% less than an investor who just held the market, and after 30 years they’d be worth 81% less.

Remember, these results reflect real people investing real money.  And they’re the average results – which means many investors did even worse.

The fault lies in people panicking and becoming excited at the wrong moments, as this graph reminds us:


People too often mistake noise for a signal to act.  In today’s world of smartphones, noise is a constant.

When looking at the results, a former chief investment strategist at Merrill Lynch said, “What’s shocking is that simply by investing, most people actually made themselves poorer.”

Once you have developed your long-term strategy, stick to it and stay invested.  Discipline is critical to success and is one of the key rewards from working with an adviser. 

Next time you consider trying to outsmart the markets, do nothing.  You’re financial wellbeing depends on it.


Author: Rick Walker. 


Source material: https://www.nytimes.com/2019/07/26/your-money/stock-bond-investing.html?em_pos=small&ref=headline&nl_art=1&te=1&nl=your-money&emc=edit_my_20190729?campaign_id=12&instance_id=11253&segment_id=15658&user_id=8343b871e4d7261b8f56bc34c365ab64&regi_id=47596349emc=edit_my_20190729

Rick Walker