Quantitative Analysis of Investor Behavior

The 24th Annual Quantitative Analysis of Investor Behavior (“QAIB”) examines real investor returns in equity, fixed income and asset allocation funds. The analysis covers the 30 year period ending December 31, 2017, encompassing the recovery from the crash of 1987, the drop at the turn of the millennium, the crash of 2008, recovery from the 2008 recession, and the bull market leading up to today. No matter what the state of the mutual fund industry, boom or bust: Investment results are more dependent on investor behavior than on fund performance. Mutual fund investors who hold on to their investments are more successful than those who try to time the market.

Advisor Edition Usage Rights

Purchase of the Advisor Edition of QAIB includes the rights to redistribute printed or electronic copies, of this complete report to clients. Please Note: The purchase of this report does not include the rights to replicate or reproduce charts and data elements separately in customized materials. In addition, purchase of the Advisor Edition of QAIB includes the rights to post this report on your company’s internal password protected website. The rights to post to the World Wide Web are not included. 

Truths About QAIB

Response to Edesess Article Published in Advisor Perspectives (10/9/2017)

If this was a first offense and had no visibility, I would laugh it off as uninformed rambling. But this is not the first offense and the article has gained some credibility by being carried in a respected publication.

This is not a laughing matter, but a serious threat to all who seek to act in the best interest of investors.

The underlying premise of the article as carried in its headline is that “Investors do not underperform their investments”. The article promotes the notion that investor performance is as good as it can be and gives an absurd reason for any belief to the contrary… a fictional error in a DALBAR calculation.

All who champion the cause of improving investor returns must rise up to challenge this nonsensical conclusion and the preposterous and false argument on which it is based. The facts of underperformance are published on DALBAR's Website, www.DALBAR.com/QAIB .

The conclusion that “Investors do not underperform their investments” flies in the face of the basics of mutual funds. These basics make it impossible for any more than 1% of investors to ever outperform an applicable index and causes the average investor to lag that index by several percentage points. The author and anyone who chooses to believe this absurd conclusion should understand the myriad of performance limiting factors that guarantees that over 99% of investors have and will underperform indices:

  • Non-uniform acquisition and withdrawal dates… performance is measured over specific time periods but investors transact on every business day
  • Sales charges (loads, 12-1 fees, redemption fees, etc.) are not included in the calculation of benchmark returns
  • Operating expenses that pay for the management, operations and distribution of investments are not factored
  • Portfolio trading costs that are incurred every time a fund buys or sells a security are absent from indices that trade “free”
  • Asset allocations into low performing asset classes such as cash and other defensive investments
  • Dividends and capital gains taken in cash are excluded since indices assume that all distributions are reinvested
  • Leakage from loans, margin interest, fees or other deductions never occur in an index
  • Opportunity cost of being out of the market during periods of appreciation is never experienced by an index which is assumed to always be fully “invested”
  • Investor trading activity ebbs and flows unlike an index that reflects a buy and hold posture
  • Psychological factors such as loss aversion, herding and excessive optimism do not influence the benchmarks
  • The irrational belief that higher prices (expenses) will yield better investments is derived from consumerism where the expectation is that prices in some way reflect value

The theory that most investors actually earn benchmark level returns is in contradiction to the fact that the balances in their individual accounts show underperformance.

If investors did earn index level returns, there would be no point in educating and advising them or creating solutions that improve performance. In other words, the work that the investment community and DALBAR have done to bring investor performance closer to index level returns would have been pointless since “investors do not underperform”. This supposition is contradicted by the fact that investor performance has significantly improved over the two decades since DALBAR's analysis has been published.

Furthermore, there is the economic absurdity that the revenue generated within the financial community is created without a net loss of investor returns. Compensation received by the entire financial community is derived from investors.

Claiming to have discovered a (non-existent) calculation error in DALBAR'methodology and blaming this for the general acceptance that investors underperform applicable indices is ridiculous on its face, in addition to being false.

The author goes on to accuse Morningstar of being a co-conspirator in this alleged massive fraud. Morningstar stands accused of quantifying one of the causes of investor underperformance. This implausible theory of a conspiracy underscores the absurdity of the article.

For the record, QAIB uses the actual balances in investor accounts each month to calculate investor profits or loss after all performance limiting factors are considered. This reflects the personal return that the average investor would see on a statement. Representations to the contrary are false. Additional research is used to identify solutions that reduce the underperformance. A compendium entitled Managing Investor Behavior that covers two decades of such solutions was recently published and is available from DALBAR.

Lou Harvey Hits Pfau Back Over Criticism of Dalbar Investor Study
Dalbar CEO says Wade Pfau, a professor at The American College of Financial Services, misses the point of the annual QAIB study, calling his criticism "silly"

April 20, 2017

Lou Harvey is talking apples. Wade Pfau is talking oranges. And never the twain shall meet, it seems.

This disparity is the crux of a beef between the two respected industry experts, says Harvey, in an interview with ThinkAdvisor. He is president and CEO of Dalbar, a leading Boston-based financial services market research company. Pfau is a professor of retirement income at The American College of Financial Services and a principal of McLean Asset Management.

When, in March, Dalbar released its “Quantitative Analysis of Investor Behavior 2017,” an annual study that now embraces the last 30 years ending December 30, 2016, findings once again showed that the typical mutual fund investor earns less than funds’ performance reports suggest. QAIB looks at retail investor behavior and returns in equity, fixed-income and asset allocation mutual funds; such investments are the most popular for generating retirement income.

After assessing the report, Pfau wrote a critical article for Advisor Perspectives charging that Dalbar’s “calculations are wrong.” And he warned “the financial services profession to stop using” the study “as a way to market the value of financial advice."...Read ThinkAdvisor article

Answering Fiction about Investor Returns with Facts

April 2016

The Quantitative Analysis of Investor Behavior (QAIB) was created to set reasonable investor expectations of investment returns and identify opportunities for investors to improve their returns.

QAIB is not and has never been an academic exercise but is a tool that reflects the way investors view their investments and how they determine the profits or losses they have. To that end, QAIB takes the most often used approach to calculating investor returns… Profits made on funds invested over a specific timeframe. This is also consistent with guidelines from the IRS and the SEC.

The most recently published fiction about QAIB is addressed here with the basic facts.

The Fiction: The 7 Worst Offenders
  1. QAIB blames low returns on dumb investors.
  2. QAIB blames only voluntary investor behavior for low investor returns.
  3. QAIB excludes expenses that make investor underperformance worse.
  4. QAIB returns canNOT be compared to fund returns as asset weighted returns can.
  5. QAIB uses a "quirky formula of its own".
  6. QAIB calculates returns based on "total assets at the end" of a period.
  7. QAIB returns are inaccurate because they are compared to an index rather than to the funds themselves.
Why the Fiction?

The reasons for creating fiction about QAIB fall into three categories:
  • Failing to understand what investor return really is… simply the money earned by investors over some specific period of time.
  • Discounting the disparity to maintain investors’ ignorant bliss… higher investor returns presents a more optimistic picture.
  • Simplistic views that ignore critical investor perceptions… such as the cost or benefit of not being invested during the period being measured.
The Facts

The truths about the 7 worst offending lies are discussed in the following sections. This section will be expanded when further questions arise or if amplification is needed.

1. QAIB blames low returns on dumb investors.
Nothing in the 20 year history assigns any blame to investors. Four factors cause the gap between investor returns and an appropriate index:
  • Availability of capital to investors for the entire period being measured.
  • Need for capital by investors before the end of the period being measured.
  • Expenses and under performance of the funds.
  • Investors’ irrational behavior, based on generally accepted but misleading opinions.
2. QAIB blames only voluntary investor behavior for low investor returns.
As indicated in #1, there are four factors that cause the low returns. Voluntary investor behavior is one of the causes.

Voluntary investor behavior includes:
  • Delaying an investment decision
  • Withdrawing funds before they are needed or withdrawing from a less than optimal source.
  • Reinvesting after there is evidence of a market recovery.
3. QAIB excludes expenses that make investor underperformance worse.
QAIB measures assets after all costs and expenses are deducted and flows after all sales charges are paid.

While some measures attempt to make adjustments for differing share classes and expense ratios, QAIB makes no such adjustments since only net assets and net flows are used.

4. QAIB returns canNOT be compared to fund returns as asset weighted returns can.
QAIB reports the returns that are most visible to most investors, the investor’s personal return and the most widely used indexes.

The decision to compare the most visible measures of return allows QAIB to reflect the investors' perception and therefore to properly define the problem. Having defined the problem, methods have been developed and are being developed to narrow the gap between these two measures. QAIB presents an "investor's" view of the fund.

Asset weighted returns by definition ignore the time during which the investor is out of the investment and do not provide a measure of the lost opportunity. As such asset weighted returns are a “fund’s” view, reflecting only returns when money is in the fund.

5. QAIB uses a "quirky formula of its own".
The description of the QAIB calculation as being "quirky" or something that is exclusive to QAIB is utterly ridiculous.

The QAIB calculation is consistent with or similar to the formula used by mutual funds, brokerage firms, insurance companies and retirement plan providers who report investor returns to their clients.

The QAIB formula is based on the IRS guidelines for calculating gains and losses. The annualization of returns uses the SEC formula for that calculation.

6. QAIB calculates returns based on "total assets at the end" of a period.
This use of the term "total assets at the end" was an unfortunate paraphrase of the term used in the report, "cost basis".

It is unfortunate that the inventor of the phrase "total assets at the end" and those who repeat it are unaware of the enormous difference in meaning of the two terms.

7. QAIB returns are inaccurate because they are compared to an index rather than to the funds themselves.
Comparing investor returns to fund returns is useful when the goal is to reach no further that what funds can earn.

QAIB takes the approach, that the ultimate goal is to perform better than the market average and thus uses the market average as the benchmark.

QAIB Products

PreOrder Version
NEW! Pre-Order 2019 QAIB Full Version

Now available for pre-order, the 2019 QAIB Full Study for the period ending 12/31/2018 will include the average investor returns over a 20 year period for over 20 different categories of investors. This study includes everything that is QAIB, as well as copyrights to its entire contents.

2018 Reports

DALBAR's Quantitative Analysis of Investor Behavior (QAIB) celebrates its 24th edition of measuring the shortfall in retail investor real returns.

PreOrder Version
2018 QAIB Full Version

Now including more investor return data than ever before, this is the 2018 QAIB Full Study for the period ending 12/31/2017. This study includes everything that is QAIB, as well as copyrights to its entire contents.

Periodic Table of Investor Returns

Get the Average Investor Returns for 23  different classifications of fund investors over the last 10 years! This Periodic Table ranks various Average Fund Investors from highest to lowest for each year.

QAIB Return Builder

Looking for more than the typical  1, 3, 5? Generate Average Investor Returns based on your custom timeframes of over 25 different categories of “Average Investors”.

QAIB Advisor Edition

Made for the average investor and designed exclusively to be a client facing communication, this version includes the rights to redistribute printed or electronic copies of the complete report to investor clients.

Copyrights Add-on

This add-on to the Advisor Edition grants purchasers of the copyrights full permission to incorporate certain materials contained within the Advisor Edition into other works on the condition that Licensee makes required regulatory disclosures and sources QAIB and DALBAR as appropriate.

2017 Returns vs. Benchmark

A graphical representation of the Average Equity, Fixed Income, and Asset Allocation Fund Investor Return for 2017 vs. benchmarks of the S&P 500, BloombergBarclays Aggregate Bond Index, and inflation.

2017 Capitalization & Style Analysis

A visual depiction of Average Investor Returns broken down by capitalization (large, mid, small-cap) and style (growth, value, blend).

Retention Rates

These 3 graphs show the Retention Rates of equity, fixed income, and asset allocation funds dating back to 1998.

The 2016 Election

QAIB look-backs take an in depth look at the average investor during specific, noteworthy periods in the stock market’s history.

2017 Fund Flows vs. S&P

Two graphs overlaid on each other. One graph tracks the S&P 500 throughout 2017 while the other tracks the net inflow or outflow of equity mutual fund assets for each month. Used to show the relationship between Average Investor’s buying/selling and market performance.

2017: Our Most Recent Year

QAIB look-backs take an in depth look at the average investor during specific, noteworthy periods in the stock market’s history.

Anatomy of Investor Returns: Harry

Meet Harry. He’s a confused, disenchanted skeptic, trying to find answers about his investment account. Use this blunt, light-hearted story to highlight concerns of the average investor and foster an honest discussion about your client-advisor relationship, and what makes you different.

The DotCom Crash

QAIB look-backs take an in depth look at the average investor during specific, noteworthy periods in the stock market’s history.

"Black Monday" (1987)

QAIB look-backs take an in depth look at the average investor during specific, noteworthy periods in the stock market’s history.

The 2008 Great Recession (2007-2009)

QAIB look-backs take an in depth look at the average investor during specific, noteworthy periods in the stock market’s history.

Quincy & Caroline

This infographic tells the story of Quincy and his wife Caroline who inherited $20,000 in 1998. They each took $10,000 and invested it in their own account. They both invested in mutual funds with similar performance but this husband and wife have very different styles when it comes to when and how much to invest. Fast forward 20 years and see how Quincy and Caroline are doing today.

For more information about DALBAR's QAIB online store, please contact Cory Clark at 617.624.7156.