"The investor's chief problem-and even his worst enemy-is
likely to be himself," once quipped the great Benjamin
The truth of Graham's observation is seen in the consistent
pattern of mutual fund investors to self-destruct.
Portfolio Report Card: Ron Grades a $480,000
Over the past 30 years, the typical stock mutual fund investor's
performance has badly lagged the S&P 500 index
(SNP:^GSPC), according to Dalbar's Quantitative Analysis of
Investor Behavior (QAIB) report. While the average mutual fund
investor earned 3.69%, the S&P 500 earned 11.11%. What
were the chief causes behind the significant undeperformance?
The underlying problem wasn't the 1987 stock market crash
(NYSEARCA:DIA), the 2000-2002 dot-com bursting (Nasdaq:QQQ),
the 2008-09 financial crisis (NYSEARCA:XLF), or poor economic
conditions - but rather - investor misbehavior. People
chase historical performance, buy the wrong things at the
wrong time, and have a knack for poor financial decision
Curiously, one of the main advantages of mutual fund investing
is supposed to be professional money management by seasoned pros.
But people have found a plethora of ways to mess up even
Unfortunately, people who buy individual stocks aren't that much
better than people who buy mutual funds.
In a study conducted at the height of the dot-com frenzy, by
professors Brad M. Barber and Terrance Odean, they found:
1. Households trade common stocks frequently. The average
household turns over more than 75 percent of its common stock
2. Trading costs are high. The average round-trip trade in
excess of $1,000 costs three percent in commissions and one percent
in bid-ask spread.
3. Households tilt their investments toward small,
high-beta stocks (NYSEARCA:IJR). There is a less obvious tilt
toward value stocks (NYSEARCA:VTV).
I recently caught up with Terrance Odean, who continues his
groundbreaking research about investors' habits at the University
of California at Berkeley. In my
video interview with Odean
, he talks about a 14-year study of Asian daytraders and how it
relates to individual investors in the U.S. and elsewhere.
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