Investing Blog Roundup: Individual Investors — Not So Dumb After All?

For many years, people in the financial industry have referred to DALBAR’s “Quantitative Analysis of Investor Behavior” studies to show that investors dramatically underperform their own investments due to poor decisions about when they buy and sell mutual funds. (You can read the 2016 edition of the report here, for instance.) The DALBAR reports consistently show large underperformance figures — often in the range of several percentage points per year.

This week, Wade Pfau published an article asserting that DALBAR is simply making a math error in their calculations — an error that makes the average investor’s performance look much worse than it actually is.

Pfau’s article is rather technical, because it’s dealing with a math dispute. But it’s interesting reading. In brief, his argument is that DALBAR doesn’t account for the fact that investors invest over time. For example, for an investor who invests a total of $10,000 over the 20-year period ending 12/31/2016 (i.e., $41.67 per month for 240 months), Pfau writes that, “the DALBAR methodology ignores the dollar-cost averaging component of these systematic investments and instead assumes that the entire $10,000 was invested at the beginning of 1997.”

John Rekenthaler of Morningstar also wrote on the topic this week, sharing Morningstar’s methodology for how they calculate investor returns (and how those differ from investment returns).