Individual Investors and the Market Timing Myth

Quantitative Analysis of Investor Behavior

There’s an annual report, called the Quantitative Analysis of Investor Behavior, produced by the DALBAR organization, that tracks the behavior of individual investors. Here’s their key finding:

Over the past 20 years, “equity fund” investors achieved an average 5.02% annualized return, which is 4.2% less than the 9.22% that he/she could have achieved by simply investing funds in an S&P500 index-tracking fund.

Although the report covers only retail investors in the US, its findings hold a mirror to investor behavior in general.

Investor education doesn’t help

Louis S. Harvey, President of DALBAR, argues that: “It is now past the time for the investment community and its regulators to understand that the principle of educating uninterested investors about the complexities of investing is unproductive.”

No matter whether the market is booming or busting, “Investor results are more dependent on investor behavior than on fund performance.” Investors who buy and hang on are consistently more successful than those who move in and out of the markets.

The report concludes:

“Attempts to correct irrational investor behavior through education have proved to be futile. The belief that investors will make prudent decisions after education and disclosure has been totally discredited. Instead of teaching, financial professionals should look to implement practices that influence the investor’s focus and expectations in ways that lead to more prudent investment decisions.”

Are our policy makers, SEBI included, taking notes?

Source: financial-math.org