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Are small investors really that bad?
Old 10-08-2012, 10:18 AM   #1
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Are small investors really that bad?

for 20 years now dalbar has been looking at investor behavior and drawing the conclusion that investors are poor investors when left to their own devices .

they sell when they should buy and buy when they should sell and morningstars investor returns which track the inflow and outflow of money show investors overall get way less of a return then the funds do.

well i happen to like michael kitce's site the nerds eye view and there was an article that raised a very valid point.

investors may be far better than dalbars 20 year study shows.


because lets assume when dalbar started this tracking 20 years ago many of us started investing in the late 1980's and 1990's.

markets were fabulous during that time frame .
one problem though , many of us didnt have much money in the markets yet as we feed our ira's and 401k's a little at a time with periodic payments..

so lets say we put 1000 bucks a year away for 10 years . lets say the markets doubled the first year and then stayed flat for 9 years.

you would have 11,000 dollars.

the markets saw a 7.2% return time wise but you got 1.73% dollar wise ..

on the other hand lets say the markets were flat for the first 9 years and doubled the last year as you put the same 1k a year away..

well you got 20k now. thats 12.3% . you beat the 7.2% the markets got.

in reality thats what happened.

the 1990's were great market years , the 2,000's were crappy market years.

the results dalbar may be tracking are example 2 . investors didnt have much money invested until they built it up in the later years and since growth was slow in the 2,000's it shows they didnt do well.

makes you wonder if since dalbar sells these reports to the industry if its ammunition for pros who can say you need us and the proof is most small investors dont do well on there own.
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Old 10-08-2012, 11:14 AM   #2
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I don't know about dalbar, but Morningstar is including those money flows in its investor returns. That was the whole purpose. So they would calculate your two scenarios (assuming they were investor averages) correctly I'm pretty sure.
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Old 10-08-2012, 11:54 AM   #3
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well it seems it may be just as flawed for many of the same reasons. dollar cost averaging in makes the reults very skewed.
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