To Succeed, Investors Need To Learn

by: Roger Nusbaum

Summary

Results from the latest DALBAR survey reports how well investors do by owning mutual funds compared to simply holding an index.

Investors need to take the time to understand how behavioral finance works in general.

Another message here is about simplicity in portfolio construction.

By Roger Nusbaum AdvisorShares ETF Strategist

The Mathematical Investor blog recapped the results from the latest DALBAR survey, which reports how well investors do by owning mutual funds compared to simply holding an index fund, no matter what happens in the market (the implication is that this is about behavioral flaws that cause people to panic-sell or panic-buy), and the results continue to not be very good.

Investors have averaged an annualized 5.02% for the last 20 years, compared to 9.22% for S&P 500 index funds.

There are at least two messages here. One has to do with investors needing to take the time to understand how behavioral finance works in general, then to gain some self-awareness of the particular cognitive errors they are most likely to make (for example, an investor is unlikely to both invest too rashly, and at the same time, suffer from analysis-paralysis).

The DALBAR results can't only be behavioral. Some amount of the lag, perhaps unquantifiable, comes from investors having to pay for life events, but most is likely from mistakes that investors make and that some investors even repeat.

Another message here is about simplicity in portfolio construction. This history of this blog, of course, is that I am a big believer in ETFs as being a meaningful part of the solution.

Seeking Alpha comments notwithstanding, it is very unlikely that a given investor will beat the market over long periods of time, but of course, with an adequate savings rate, suitable asset allocation and the self-awareness to recognize behavioral vulnerabilities an investor can have financial-plan success.

While most of this is ground we have covered before lately, the idea of being eager to continue learning has also come into the conversation.

Regardless of what direction you think interest rates are headed, after 5+ years of historically low interest rates, the fixed income market has become more complicated than it was during the thirty-whatever-year declining rate era. If you think rates are going higher, then you need to figure out how to protect your portfolio and seek alternatives like maybe liquid alternatives (on this blog, we used to just call them diversifiers). If you think rates are going to stay where they are or go lower, then you need to figure out how to generate yield from that part of the portfolio.

Both require the willingness/eagerness to keep learning. While this trait can help with healthy and successful aging, it is also necessary for both individual investors as well as financial professionals.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: To the extent that this content includes references to securities, those references do not constitute an offer or solicitation to buy, sell or hold such security. AdvisorShares is a sponsor of actively managed exchange-traded funds (ETFs) and holds positions in all of its ETFs. This document should not be considered investment advice and the information contain within should not be relied upon in assessing whether or not to invest in any products mentioned. Investment in securities carries a high degree of risk which may result in investors losing all of their invested capital. Please keep in mind that a company’s past financial performance, including the performance of its share price, does not guarantee future results. To learn more about the risks with actively managed ETFs visit our website AdvisorShares.com. AdvisorShares is an SEC-registered RIA, which advises to actively managed exchange traded funds (Active ETFs). The article has been written by Roger Nusbaum, AdvisorShares ETF Strategist. We are not receiving compensation for this article, and have no business relationship with any company whose stock is mentioned in this article.