Average Investor Returns

[hellbender]

It is one thing to look at historical market performance data, but what do you believe is actually achieved by the average stock investor.   First person opinions are sought but referenced expert sources are particularly welcome and appreciated.

 

[brewer12345]

I am aware that you have an axe to grind, but maybe you could clarify: are you asking what potential return any individual investor could get (i.e. anyone can go to VG or Fido and get cheap index funds), or are you talking about the average of all investors(including the fools who frenetically trade, buy load funds, listen to full service brokers, etc.)?

 

[wabmester]

I'm not sure how to answer the question as worded, but the studies of interest include:

the Dalbar Study

and

Barber and Odean

 

[hellbender]

I am aware that you have an axe to grind, but maybe you could clarify: are you asking what potential return any individual investor could get (i.e. anyone can go to VG or Fido and get cheap index funds), or are you talking about the average of all investors(including the fools who frenetically trade, buy load funds, listen to full service brokers, etc.)?

I am interested only in actual returns (as opposed to theoretical) achieved by real world investors, if that type of information is even available.  I imagine that would represent a cross section of equities investors including those who may from time to time engage in activities that are not in their best interests as well as those who have superior stock market investing investing skills.  I am sure that the equity investors on this forum do somewhat better than average since they have taken the time to educate themselves and obviously are continuing to invest significant amounts of time and study in order to become even better investors.  It is true that I don't invest in equities myself at the present time for a variety of reasons but I don't see why you should be threatened by this fact.  I am also investing the time to become a better investor and money manager.  I have found I can learn more from those with open minds who present reasoned opinion and factual data.  I hope this board is that kind of place.  I don't believe I have made any representations on this board either for or against equities. . . . . only that at the present time that I personally do not invest in them.

 

[hellbender]

I'm not sure how to answer the question as worded, but the studies of interest include:

the Dalbar Study

and

Barber and Odean

Thanks for the information.  It is appreciated.

 

[rmark]

Arnott, Casscells “Demographics and capital market returns” paper
Dichev “What were stock investors actual historical returns?” paper
Dimson, Marsh, Staunton “Irrational optimism” paper
Frazzini “Dumb money: mutual fund flows and the cross-section of stock returns” paper
Jorion “Long term risks of global stock markets” paper
Jorion, Goetzmann “Global stock markets of the 20th century” paper

 

[rmark]

I think most of these are online through www.scholar.google.com

 

[semtex]

Usually normal guys give up trading in three years. Got burned.


brewer12345, your fleet is doing good. DRYS,....

Take a look at CLL.TO , a Canadian oil sand stock. It is a good long term investment candidate.

 

[Nords]

I am interested only in actual returns (as opposed to theoretical) achieved by real world investors, if that type of information is even available. 

I imagine that would represent a cross section of equities investors including those who may from time to time engage in activities that are not in their best interests as well as those who have superior stock market investing investing skills.  I am sure that the equity investors on this forum do somewhat better than average since they have taken the time to educate themselves and obviously are continuing to invest significant amounts of time and study in order to become even better investors.  It is true that I don't invest in equities myself at the present time for a variety of reasons but I don't see why you should be threatened by this fact.  I am also investing the time to become a better investor and money manager.  I have found I can learn more from those with open minds who present reasoned opinion and factual data.  I hope this board is that kind of place.  I don't believe I have made any representations on this board either for or against equities. . . . . only that at the present time that I personally do not invest in them.

How much of the Return available from the stock market is realized by the average investor?
It is one thing to look at historical market performance data, but what do you believe is actually achieved by the average stock investor.   First person opinions are sought but referenced expert sources are particularly welcome and appreciated.

Hunh-- those seem like two completely different sets of questions to me.

Part of the board's reaction to this type of poll/question comes from a previous poster, JohnGalt (also JG & MrGalt2U) who quite defiantly (and repetitively) announced his aversion to equities.  Other comments of his gave one the impression that he was short of assets, as well as a host of other contradictory statements that led one to believe that a former accountant & captain of industry should be comfortable with equities.  Enough inconsistencies piled up over his 7000 posts to invalidate his credibility (or to at least render his statements incredible), including his strident objections to stocks.

I think people also use the word "risk" without a proper context-- volatility risk, sector risk, single-stock risk, loss-of-principal risk, inflation risk, and so on.  So avoiding stocks because they're "risky" doesn't exactly clarify the issue.

 

[brewer12345]

I am interested only in actual returns (as opposed to theoretical) achieved by real world investors, if that type of information is even available.  I imagine that would represent a cross section of equities investors including those who may from time to time engage in activities that are not in their best interests as well as those who have superior stock market investing investing skills.  I am sure that the equity investors on this forum do somewhat better than average since they have taken the time to educate themselves and obviously are continuing to invest significant amounts of time and study in order to become even better investors.  It is true that I don't invest in equities myself at the present time for a variety of reasons but I don't see why you should be threatened by this fact.  I am also investing the time to become a better investor and money manager.  I have found I can learn more from those with open minds who present reasoned opinion and factual data.  I hope this board is that kind of place.  I don't believe I have made any representations on this board either for or against equities. . . . . only that at the present time that I personally do not invest in them.

OK, well, whatever. I see the Dalbar study quoted frequently, although it does have its problems. I take it as an object lesson. In an unfortunately large number of cases, people manage to shoot themselves in the foot on this stuff. It doesn't have to be harder than plunking some money in a balanced fund that doesn't charge too much, but most people are not even educated enough to figure that out.

HB, IIRC, you have a large pension that pretty much covers everything, plus a significant amount invested in RE. Do you have a risk budget/risk tolerance in mind for your portfolio? I know you have little interest in taking undue risk, which I think is wise. Dabble in bonds at all?

 

[JohnP]

In "The Relentless Rules of Humble Arithmetic" http://www.vanguard.com/bogle_site/sp20060101.htm
John Bogle (founder of Vanguard) lays out the real returns to the mutual fund owner after backing out the various expenses, overheads, etc for the various fund companies - Table 4 and 5 show Vanguard to return 76% of the underlying stock market value to the mutual fund owner - the highest return was Dodge & Cox (98%) and lowest was JP Morgan  (32%)

Very interesting presentation that, I think, is at least a partial answer to your question.

JohnP

 

[hellbender]

HB, IIRC, you have a large pension that pretty much covers everything, plus a significant amount invested in RE.  Do you have a risk budget/risk tolerance in mind for your portfolio?  I know you  have little interest in taking undue risk, which I think is wise.  Dabble in bonds at all?

I guess I don't since I had to look up the term "risk budget"  I found this definition:

"Risk Budget
Output from one of a number of quantitative models used by asset or liability managers. The models are designed to control the aggregate risk of the asset or liability portfolio and to allocate acceptance of risk in a way that will optimize risk acceptance to give the portfolio the maximum return possible on the risks accepted. Useful risk budgeting models will incorporate value at risk assignments that have been converted from efficient portfolio allocations. These value at risk assignments may be allocated across asset classes, investment strategies, investment managers, or risk factors and may be defined in either absolute or relative terms. An appropriate risk budget should be mean-variance efficient in either absolute or relative dimensions. "

Well that is one mouthful of a definition.   After reading it, I fairly certain I don't have one.   Frankly, the above sounds like something a money manager would say to his client in an attempt to to convince him that he knows what he is doing and will make him/her a lot of money.  The only quantitative model I use is a fairly involved spreadsheet which I designed and taylored for my own specific situation. Using absurdly conservative assumptions for inflation, medical inflation, investment performance, long term care needs, etc. the model says I will be just fine well beyond any reasonable life expectancy.

I don't own individual bonds.  I am mostly in cash (CDs, short term bond funds, G-Fund), investment (income producing) real estate and notes conservatively secured by real estate that I wouldn't mind owning in the event of default.

 

[Nords]

I don't own individual bonds.  I am mostly in cash (CDs, short term bond funds, G-Fund), investment (income producing) real estate and notes conservatively secured by real estate that I wouldn't mind owning in the event of default.

As long as we're beating inflation and sleeping at night, it probably doesn't matter what assets we invest in.

 

[hellbender]

In "The Relentless Rules of Humble Arithmetic" http://www.vanguard.com/bogle_site/sp20060406.htm
John Bogle (founder of Vanguard) lays out the real returns to the mutual fund owner after backing out the various expenses, overheads, etc for the various fund companies - Table 4 and 5 show Vanguard to return 76% of the underlying stock market value to the mutual fund owner - the highest return was Dodge & Cox (98%) and lowest was JP Morgan  (32%)

Very interesting presentation that, I think, is at least a partial answer to your question.

JohnP

Thanks for the link.  I really respect J. Bogle.    In this paper from last year:
  "The Uncanny Ability to Recognize the Obvious"
http://johncbogle.com/speeches/JCB_FMA1005.pdf#search=""average investor" site:johncbogle.com"    

Bogle states:

"But largely because of poor timing and poor fund selection, the average fund
investor has lagged by another 3 percentage points. Result: in this grand era for investing, the
average investor has captured but 27 percent of the market’s compounded return. Clearly, as Mr.
Buffett warns, the principal enemies of equity investors are expenses and emotions." 

 

[donheff]

Result: in this grand era for investing, the
average investor has captured but 27 percent of the market’s compounded return.

I have a hard time understanding what is what with all of this expenses discussion. DW and I have a significant amount of money tied up in load funds from years ago and thru DW's 401K and retirement plans. Funds like Dodge and Cox and Calamos. Trying to figure out our individual ROI is a nightmare due to DCAing in through payroll deductions so I gave up trying to figure that out. When I look at Morningstar info on total return year by year it looks like we have done very well on most of the funds we hold. If I compare the numbers to any of the no-load index funds we appear to be fine. For this reason I don't see any strong reason to move the funds that we are currently free to move over to indexes. The same thinking would likely apply when DW retires and her funds are freed up.

Is there something significant I am missing, or is Morningstar's total return data a valid yardstick to base our evaluations on (at least in the rear view mirror)?

 

[TromboneAl]

Most investors use the "I can't stand it" method of market timing. When it goes down, they reach the point when they can't stand it, and they sell. When it goes up, they can't stand hearing how their friends are making so much and they buy. Buy high, sell low.

Also, do we include the people who have their money in a 2% interest passbook account?

 

[mb]

Donheff, Dodge & Cox is a no-load fund family.

 

[maddythebeagle]

I am still not sure what the point of this thread is....I dont see a lot of "average" investors on this board 

 

[LOL!]

I was including all folks in my answer. Many of them do not invest in the stock market ever, but are content to spend their money as they get it or to invest at their local bank in a savings account.

Trying to figure out our individual ROI is a nightmare due to DCAing in through payroll deductions so I gave up trying to figure that out.

I think you need to use software like Quicken or MSMoney or the XIRR function of excel to get your ROI. You must enter every transaction accurately though (date, $, number of shares). There is no real shortcut if you want a valid ROI.

 

[dmpi]

Short term, stocks are mostly a zero-sum game. For all the people losing money, somebody else must be gaining it. Long term stock tend to grow, the indexes should track the total value of the stock market.
Since you said “average” investor rather than the “median” investor, I would think that the average investor would track the indexes which is roughly 10% per year.

For me personally, I have done about 8% + 2% from dividends over my 19 years of investing.

 

[mathjak107]

im running at about 12-13% annually on average since 87 up to last year....i have to admit though i have been following the same newsletter since then and following their lead.....but non the less life is about not knowing everything but knowing where to go to get the info you need.....  left to my own devices i think my returns would be lower as i tend to take profits to quickly when im in the drivers seat leaving to much on the table

 

[mathjak107]

as of last year i toned my portfolio down as all those years i was following the growth mix only in my newsletter...as i prepare for ER i started to use an income mix , a growth and income mix and my growth mix as i started investing for different time frames in the different models ...my returns will be less than the 12-13 % and should come in the 7-8 % overall area ....this is my first year so im not sure what my reduced risk mix will give me....

 

[ladelfina]

I'm confused about the poll.  Do 30% of the respondents to date really think that the "average investor" gains only 10% of the total return of the stock market?

I.e., if in 2005 the market returned 12%, then the "average investor" got 1.2% 

What does "return available" actually mean? The bestest stock picker ever picking just the handful of stocks that go up 200% or 300%?? Those kind of returns are 'available' but just damned unlikely! 

Open to any corrections if my comprehension is lacking here.

 

[JohnP]

ladelfina - Good question! 

I voted 50% in the poll after reading about typical investment approaches with typical mutual fund houses.  The John Bogle article  "The Relentless Rules of Humble Arithmetic" http://www.vanguard.com/bogle_site/sp20060101.htm elegantly steps through the process of starting with the values of the underlying stocks in the market and subtracting expenses, overheads, and unfortunate buy/sell decisions that lead to reduced "Average Investor Gains".

- The best you can have is the basic stocks and their dividends for an actual market return value.

- If you have these stock within a mutual fund at a vendor (such as Vanguard or Fidelity) your return would be reduced by the ER and some other associated trading costs and overhead, and also by advisor fees.  As a result you, as the mutual fund owner, would receive typically 93-98% of the actual market returns of the underlying stocks. 

- If you then chose to attempt to market-time and move in-and-out of the market at inappropriate times, then your transaction costs, etc could reduce your actual market returns even more.  Bogle says that the typical MF owner realizes 60-65% of the actual market returns.

What I found most significant in the "...Humble..." article above, was the systematic expenses associated with having your funds with different vendors; Bogle indicates that merely buying your funds from different vendors can change your returns within a range from 98% to 36% of actual market returns of the underlying stocks. 

I've learned many things here - if you have a stable asset allocation in mind, buy etfs instead of mutual funds, stay the course, chose a low cost vendor and keep away from advisors.

Great poll Hellbender!

JohnP

 

[donheff]

Donheff, Dodge & Cox is a no-load fund family.

Sorry, Dodge and Cox is in DW's firms's plan, but the question remains the same. With Dodge and Cox, or a load fund, do the total return figures from Morningstar give you an accurate picture (in hind-sight) of performance versus an index fund. That is what I have always understood. The question's relevance has to do with what I do with existing load funds (load paid off) that are doing well - move em, or leave em?

I think you need to use software like Quicken or MSMoney or the XIRR function of excel to get your ROI. You must enter every transaction accurately though (date, $, number of shares). There is no real shortcut if you want a valid ROI.

I recognize that the calculation can be done but I don't have the historical data so I am stuck with where I am now and going forward. JohnP's suggestion to use ETFs to set-up your stable allocation and then just leave it alone sounds pretty good to me if, and when, I decide to move these funds.