Yearly Reality Check – Dalbar QAIB 2016

posted on June 20th, 2016 by Bellmont Research Team

When it comes to investment returns and performance the majority of investors are their own worst enemy. With investor behaviour being the biggest detractor of returns rather than market conditions, and it is that time of year again when we get confirmation of this. For regular readers of our blog you would be more than familiar with the annual research paper from Dalbar entitled Quantitative Analysis of Investor Behaviour (you can read the posts from the last couple of years here and here). 
Rather than write a detailed article as we have done in the past we instead will highlight some of the key findings and analysis from the research, a full version of the paper can be read here.


From the paper.

“The goal of the Quantitative Analysis of Investor Behaviour is to improve performance of both independent investors and financial advisors by managing behaviours that cause investors to act imprudently. It offers guidance on how and where investors behaviours can be improved.

Quantitative Analysis of Investor Behaviour 2016 examines real investor returns in equity, fixed income and asset allocation funds. The analysis covers the 30-year period to December 31, 2015 encompassing the crash of 1987, the drop at the turn of the millennium, the crash of 2008, plus the recovery periods of 2009, 2010 and 2012.”

Dalbar neatly summarises their findings and If you take nothing else away from this post we implore you to ponder the following.

“No matter what the state of the mutual (in Australia we refer to mutual funds as managed funds) fund industry, boom or bust: Investment results are more dependent on investor behaviour than on fund performance. Mutual fund investors who hold on to their investments have been more successful than those who try to time the market.”

Key Findings

Here is a snapshot of some of the key findings.

  • “In 2015, the average equity mutual fund investor underperformed the S&P 500 by a margin of 3.66%. While the broader market made incremental gains of 1.385%, the average equity investor suffered a more-than-incremental loss of -2.28%”
  • “No evidence has been found to link predictably poor investment recommendation to average investor underperformance. Analysis of the underperformance shows that investor behaviour is the number one cause, with fees being the second leading cause.”
  • “In 2015, the 20-year annualised S&P return was 8.19% while the 20-year annualised return for the average equity mutual fund investor was only 4.67%, a gap of 3.52%”

The cause of poor decision making

Investor psychology

“After decades of analysing investor behaviour in good times and in bad times, and after enormous efforts by thousands of industry experts to educate millions of investors, imprudent action continues to be widespread. It has become clear that improvements through investor education have only produced marginal benefits.

Investor behaviour is not simply buying and selling at the wrong time, it is the psychological traps, triggers and misconceptions that cause investors to act irrationally. That irrationality leads to the buying and selling at the wrong time which leeds to underperformance.”

Dalbar hits the nail on the head. Investors make irrational decisions, although we do not like to acknowledge it! We all have a valid reason for buying or selling a stock, however the overwhelming evidence is that the ‘sound’ reasons we are convinced of for the most part are based on our and behaviour rather than prudent investment logic (ie – the profitability and earning of the business your are investing in). Too often investors are swayed into making decisions based on market commentary, i.e. China’s perceived hard landing.

Short-Term Focus and Market Timing

Again from the paper.

“One thing that all the negative behaviours have in common is that they can all lead investors to deviate from a sound investment strategy that was narrowly tailored towards their goals, risk tolerance and time horizon. The data shows that the average investors has not stayed invested for a long enough period of time to reap the rewards that the market can offer a more disciplined investor. The data also shows that when investors react, they generally make the wrong decision.”

“Investors lack the patience and long-term vision to stay invested in any one fund for much more than 4 years. This short-term retention does not adhere to a prudent, long-term strategy and is likely the result of short-term thinking and market timing. This begs the questions: have investors’ market timing been successful?”

“Unfortunately for the average mutual fund investor, they gained nothing from their prognostications. To the country, the average mutual fund investor left a considerable amount of money on the table.”

We all want to achieve instant success whether its in our work, goals or investments. The reality is that instant success is not achievable, rather patience and discipline is what leads to success. Consider weight loss as an example, discipline in diet and daily exercise will lead to weight loss over time. There is no magic formula to instantly lose weight. The same is true for investing, if you could try your luck at the casino.

The consequences of poor decision making

“We have seen the various psychological phenomena that take hold of an investor at various points of the market cycle. Some are driven by fear, some by greed and others by misconceptions perpetuated by our limited experiences and outside influences.”

“If one looks at the returns of the average investor against the returns of the overall market, it is clear that the consequences of this investor behaviour is serious and detrimental to long-term financial goals.”

“In 2015, the 20-year annualised S&P return was 8.19% while the 20-year annualised return for the average equity mutual fund investor was only 4.67%, a gap of 3.52%”

If after reading this you are still unconvinced and think that you make perfectly rational decisions 100% of the time then consider enormous financial impact in dollar terms.

Based on a $250,000 investment with the market averaging a return of 8.19% and the average investor 4.67% this is what it looks like in dollar terms.


After 20 years if you had just left your money in the market you would be better off by $584,079.45!!! The includes the periods of GFC, European crisis, tech crash etc!


Unfortunately investors tend to be their own worst enemy. Our behavioural biases lead to irrational decision making, resulting in short term market guessing and irreparable damage to returns.

At Bellmont we do not profess to have a crystal ball which helps us to time the market, providing our clients with superior returns. To the contrary we believe the evidence is clear (through Dalbar and years of other academic research) that it is impossible to consistently time the market. Rather through disciplined long term investing via a systematic approach (using computers to remove behavioural biases), we help our clients achieve successful long term returns through the course of all market cycles.

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