Retail Investors Badly Trailing the S&P 500

[NW-Bound]

I just saw this article in Yahoo Finance Web site, which said that while the S&P 500 is down -11.31% from 11/01/2021 to 04/12/2023, retail investors are down -27.49%. Wowzah!

Who are these retail investors? Anyway, that's the number quoted from VandaTrack Research.

See article here: https://finance.yahoo.com/news/reta...ses-despite-a-2023-stock-rally-134826847.html

What do these retail investors do to lose so much? Buy high/sell low obviously.

Out of curiosity, I computed my own number for 11/01/2021 to 04/12/2023: -2.474%.

I feel so much better now.

 

[luckydude]

As described in the article, a lot of retail investors were heavily into tech stocks, so it's not a surprise that they've lost their shirt in the current tech bust. They gleefully rode them all the way up, and then all the way down (no doubt in shock and disbelief that the tech party didn't go on forever as they expected). Hopefully they've learned a lesson or two about diversification.

 

[arcyallen]

DALBAR publishes data on this every year. People are notoriously bad investors! Despite us all being so smart, the active decisions we make in our investments typically hurt our performance by a wide margin. And it's not a one off - it happens practically every year. Which is very telling.

I remember Peter Lynch (who ran the Magellan Fund for a legendary stretch) saying he loved managing the fund, and loved the performance HE generated, but was dismayed that the fund investor, on average, BROKE EVEN. That's investing in an incredibly high performing fund! All because people would jump in and out instead of buying and holding.

 

[Montecfo]

Yes. I have followed this for years.

Stay Fully Invested.

 

[yhoomajor]

Well, most active (institutional) investors, mutual funds trail S&P500 over long period of time, as well. So this is not limited to just retail investors.

 

[NW-Bound]

Out of curiosity, I computed my own number for 11/01/2021 to 04/12/2023: -2.474%.

I feel so much better now.

They pick the start date of 11/01/2021, but the top of the market was on 1/3/2022. If counted from there, the S&P has lost -14.82%, and not -11.31%.

And I recall why I am not really happy. My own portfolio peaked later than the S&P on 3/29/2022. If counted from there, my portfolio has lost -7%.

As described in the article, a lot of retail investors were heavily into tech stocks, so it's not a surprise that they've lost their shirt in the current tech bust. They gleefully rode them all the way up, and then all the way down (no doubt in shock and disbelief that the tech party didn't go on forever as they expected). Hopefully they've learned a lesson or two about diversification.

Nah! People never care about diversification. Or they forget when the next hot stock comes around. Buy, buy, buy...

They believe in strength in the numbers. That is until they find out that the smarter guys already sold, leaving them holding the bag.

 

[NW-Bound]

DALBAR publishes data on this every year. People are notoriously bad investors! Despite us all being so smart, the active decisions we make in our investments typically hurt our performance by a wide margin. And it's not a one off - it happens practically every year. Which is very telling.

I remember Peter Lynch (who ran the Magellan Fund for a legendary stretch) saying he loved managing the fund, and loved the performance HE generated, but was dismayed that the fund investor, on average, BROKE EVEN. That's investing in an incredibly high performing fund! All because people would jump in and out instead of buying and holding.

Retail investors jumping in/out of active mutual funds cause the MF managers to buy high/sell low. This happens to a lesser extent with index funds too.

Just like your house value going up/down, even though you don't buy/sell your home like the house flippers.

Yes. I have followed this for years.

Stay Fully Invested.

Well, the above work if you have the right stocks, or at least do indexing.

Staying invested in dot-coms or subprime lenders did not work out so well in the past.

 

[dmpi]

Could it be that 'retail investors' are also holders of bond fund ETFs? I lost a boatload and I don't see getting it back anytime soon.

 

[OldShooter]

Well, most active (institutional) investors, mutual funds trail S&P500 over long period of time, as well. So this is not limited to just retail investors.

No it's not. There is over a half-century of data showing that almost all (90%)+ stock pickers are losers over the long haul. Due to the random nature of the market, in any year there are winners among stock pickers but this is basically luck.

In one of Richard Thaler's books he describes that he and a grad student team were hired by a major trading fund. The objective was to better reward the best traders. Their conclusion , presented in detail to top management, was that the firm was basically rewarding luck. The study result was buried without a funeral and the compensation went unchanged.

Here is a chart I use in my Adult Ed investing classes. It's a tad elderly but the result hasn't changed. (Note that these are total return numbers.)

​

 

[NW-Bound]

Well, most active (institutional) investors, mutual funds trail S&P500 over long period of time, as well. So this is not limited to just retail investors.

If so many investors trail the S&P, there must be some who beat the S&P, else things would not average out. The winner group is albeit in smaller numbers, and they stay quiet.

And when large masses give up their money to a smaller group, the latter of course holds riches beyond comprehension because of wealth concentration. Perhaps that's how billionaires are made.

 

[OldShooter]

If so many investors trail the S&P, there must be some who beat the S&P, else things would not average out. The winner group is albeit in smaller numbers, and they stay quiet.

Actually not. You are missing the fact that the market is essentially random. So there is no "persistence" in year-to-year results Here’s another slide example showing how the top quintile over five years fared in the next five:

Also, here's a pretty good paper from Dr. William Sharpe on active investor arithmetic: https://web.stanford.edu/~wfsharpe/art/active/active.htm (An interesting thing about Dr. Sharpe's argument is that since individual investors have lower costs than professionals, it should be easier for them to excel. Unfortunately that does not seem to be the case.)
and interview here: https://www.ishares.com/us/insights/etf-trends/qa-with-nobel-laureate-william-f-sharpe-on-indexing

Another research result: Dr. Kenneth French on identifying superior managers: https://famafrench.dimensional.com/videos/identifying-superior-managers.aspx

 

[NW-Bound]

Actually not. You are missing the fact that the market is essentially random. So there is no "persistence" in year-to-year results...

Sure. Anything can happen from one year to the next. We all know that.

But if there are so many investors losing to the market in the long term, then there must be others who win in the long term.

Else, the arithmetic will not work.

 

[OldShooter]

... But if there are so many investors losing to the market in the long term, then there must be others who win in the long term. Else, the arithmetic will not work.

Sure it does. The winners every year are different. The arithmetic works out just fine even though there are few or no consistently big winners. I suggest Dr. French's video. https://famafrench.dimensional.com/v...-managers.aspx

NB, this idea that the market is close to random was, for me, a very heavy lift. How could that be? Well, the interview with Ben Graham in 1976 (close to his death) comes close to explaining.

The guru of value investing: " ... I am no longer an advocate of elaborate techniques of security analysis in order to find superior value opportunities. This was a rewarding activity, say, 40 years ago, when our textbook "Graham and Dodd" was first published; but the situation has changed a great deal since then. In the old days any well-trained security analyst could do a good professional job of selecting undervalued issues through detailed studies; but in the light of the enormous amount of research now being carried on, I doubt whether in most cases such extensive efforts will generate sufficiently superior selections to justify their cost. To that very limited extent I'm on the side of the "efficient market" school of thought now generally accepted by the professors [The Efficient Market Hypothesis}."http://www.grahamanddoddsville.net/wordpress/Files/Gurus/Benjamin%20Graham/A%20Conversation%20with%20Ben%20Graham%20-%20Financial%20Analysts%20Journal%20-%201976.pdf​

 

[NW-Bound]

Sure it does. The winners every year are different. The arithmetic works out just fine even though there are few or no consistently big winners...

I think there are consistent big winners. These guys are in the billionaire club, and of course there are a lot fewer of them than the poor schmucks.

 

[Out-to-Lunch]

But if there are so many investors losing to the market in the long term, then there must be others who win in the long term.

Else, the arithmetic will not work.

I think those winners are called "Brokers" and "Financial Advisors." The winners vs. losers thing is in reference only to net gains.

 

[NW-Bound]

I think those winners are called "Brokers" and "Financial Advisors." The winners vs. losers thing is in reference only to net gains.

These are winners all right, but small-time ones. I am thinking of the billionaires like Soros and quite a few other hedge fund managers.

These are stock and commodity traders and not business owners, hence make money by trading securities, buying low/selling high and not by making things or providing services.

 

[NW-Bound]

Think about it. For a small investor losing $10K, you need 100,000 of them to lose $1 billion dollars to the smarter trader.

And we keep reading about this and that billionaire making multi billions by playing the opposite of the novice investors.

 

[Montecfo]

If you think consistently moving higher is the definition of "randomness", then I think you misunderstand the word.

Random movements are directionless or without a pattern.

Stock movements reflect a clear pattern. Values grow and stock prices move higher over time.

 

[mrfeh]

Sure. Anything can happen from one year to the next. We all know that.

But if there are so many investors losing to the market in the long term, then there must be others who win in the long term.

Else, the arithmetic will not work.

This is incorrect. All it takes is somebody to not be invested when an asset is increasing in value to produce more losers than winners.

Which, of course, is exactly what most humans do (buy high, sell low).

 

[Dtail]

These are winners all right, but small-time ones. I am thinking of the billionaires like Soros and quite a few other hedge fund managers.

These are stock and commodity traders and not business owners, hence make money by trading securities, buying low/selling high and not by making things or providing services.

Over the long term, many hedge funds make money off of keeping 2% of assets and 20% of the profits.
In general over the long term, most hedge funds don't perform better than low cost index funds. In the past, perhaps there were some bigger winners. Buffett for example does not beat the indexes anymore.
Also some hedge funds do trade on potential inside information. I saw the results of this personally, but wouldn't hold up in a court of law.

 

[NW-Bound]

This is incorrect. All it takes is somebody to not be invested when an asset is increasing in value to produce more losers than winners.

How?

Let's say we have 10 investors. Investor #1 is weak, and sells out when the market declines. The other 9 investors buy his shares. More losers than winners?

Which, of course, is exactly what most humans do (buy high, sell low).

That's the reverse of my simple example earlier.

Out of 10 investors, you have more than 5 who sell. The few investors who buy from these weak investors make money.

This is back to what I wrote earlier: if there are so many retail investors who trail the S&P by selling low, then there has to be other investors who beat the S&P by buying low. There has to be a buyer for every seller.

Another simple example: If the average height of all men is 5'9", then for every man who is under 5'9", there has to be someone above 5'9". Else, the arithmetic will not work, unless EVERYONE is exactly 5'9".

The parallel to everyone being 5'9" is if everyone is a buy-and-holder and nobody sells nor buys!

But if there's no buying/selling, then the market does not move, and we will not have this discussion. No stock movement! Life would be boring.

 

[NW-Bound]

Over the long term, many hedge funds make money off of keeping 2% of assets and 20% of the profits.
In general over the long term, most hedge funds don't perform better than low cost index funds. In the past, perhaps there were some bigger winners. Buffett for example does not beat the indexes anymore.
Also some hedge funds do trade on potential inside information. I saw the results of this personally, but wouldn't hold up in a court of law.

I read about the above too!

Hence, it is perplexing when I read that so many investors trail the S&P badly.

Who are the winners who bought the shares of these investors?

 

[mrfeh]

How?

Let's say we have 10 investors. Investor #1 is weak, and sells out when the market declines. The other 9 investors buy his shares. More losers than winners?

I already explained it (as did others). Investor A is not invested when an asset increases in value: they will trail expected returns. Somebody that is invested during this time is not beating expected returns, they are merely matching them.

The only way to beat expected returns is to buy low and sell high, which most investors fail to do. Which leads to the boglehead approach: don't try to time the market, just remain invested and receive expected returns.

 

[jfn111]

DALBAR publishes data on this every year. People are notoriously bad investors! Despite us all being so smart, the active decisions we make in our investments typically hurt our performance by a wide margin. And it's not a one off - it happens practically every year. Which is very telling.

I remember Peter Lynch (who ran the Magellan Fund for a legendary stretch) saying he loved managing the fund, and loved the performance HE generated, but was dismayed that the fund investor, on average, BROKE EVEN. That's investing in an incredibly high performing fund! All because people would jump in and out instead of buying and holding.

The average investor in the Magellan Fund actually lost money- The average investor lost money in the Fidelity Magellan fund under Peter Lynch's tenure during a period of time when the fund returned around 29% annually.
https://www.forbes.com/sites/forbes...are-costing-themselves-money/?sh=18b1b9b25e30

 

[Montecfo]

I already explained it (as did others). Investor A is not invested when an asset increases in value: they will trail expected returns. Somebody that is invested during this time is not beating expected returns, they are merely matching them.



The only way to beat expected returns is to buy low and sell high, which most investors fail to do. Which leads to the boglehead approach: don't try to time the market, just remain invested and receive expected returns.

Perhaps an even more critical message from Dalbar is:

Stay Fully Invested.

I view this as more important that WHAT you are invested in. If you notice, the Dalbar investors that were in bonds also trailed the bond market. Why? They violated this simple rule.

Most humans lack the demeanor to buy low and sell high. Most of us want to buy when people at cocktail parties are talking about stocks and are afraid to buy in huge selloffs when gloom and defeat are everywhere.

This is normal for most of us.

So get Fully Invested.

Then Stay the Course-Thousand points of light-Stay the Course.

Maybe that is the 2nd most important message.