3 Destructive Investor Biases the DALBAR Report Reveals About Investing During Retirement

DALBAR Inc. is the financial community’s leading independent expert for evaluating, auditing and rating business practices, customer performance, product quality and service. 

Since 1994, DALBAR’s Annual Quantitative Analysis of Investor Behavior (QAIB) has measured the effects of investor decisions to buy, sell, and switch into and out of mutual funds over short and long-term timeframes.  These effects are measured from the perspective of the investor and do not represent performance of the investments themselves. 

According to DALBAR’s 2020 QAIB, the average stock fund investor earned only half of what the broad stock market index earned each year over the last 30 years. 

From January 1990 through December 2019:

  • 9.96% per year: Average annual return of the S&P 500 stock market index (with dividends reinvested)
  • 5.04% per year: Average annual return of average stock fund investor (i.e. not a fund, but a person)

Take a moment to read those again to let them sink in.

Why Are Investment Results So Awful?

The question we always have to ask after reading these disturbing results is why?  

Why do the investment results of the average stock fund investor so drastically trail the most basic index of broad stock market returns year after year?

The only two logical possibilities are:

  • “how” they invested, i.e. when they bought, when they sold, what they chased, what they were scared out of, etc., i.e. their investing behavior, and
  • the fees they paid, which ate into their returns. 

Let’s closely examine these root causes so we can help you avoid these horrific results and close this gap!

Destructive Investor Biases

When we closely examine investors, as I have for decades, there are several biases that they bring to the investing table each day which drive their investing behavior.  And, this is what leads to the horrific results reported by DALBAR. 

Let’s examine three of the most common investor biases to avoid:

  • Recency Bias: The first of those is Recency Bias, i.e. mistaking recent events for ongoing “trends,” and thus repositioning your investments accordingly in order to take advantage of your “hunch.”

    This is a challenging one to navigate because we all want to believe that there is a direct correlation between what just happened and what will now happen next. 

    Think of March 2020 during the COVID pandemic outbreak when stock market prices fell over 35% in just 30 days.  Believing that was a “trend,” millions of Americans sold out of over $300 billion of stock mutual funds.

    Once again, however, markets rebounded swiftly recovering in just a few short months while all of those investors who sold out missed the recovery.

    Unfortunately, as Warren Buffet stated: “investors project out into the future what they have most recently been seeing.”
  • Endowment Effect Bias: Another bias is what is known as the Endowment Effect Bias which occurs when investors place greater value on something they already own, i.e. they are very subjective

    They begin the process by justifying what they have done up until now, and focus on what they already own as the starting point.  This information is of value when trying to understand the mindset behind prior decisions.  But, it is of no value when objectively evaluating and designing an effective investment mix to achieve long term future goals.

    A great question to ask if you find yourself engaging in this behavior is, “if you didn’t already own what you currently own, and all of your money was in cash, would you go out and buy the exact investments in the exact same quantities as you currently hold them?”

    When asked that way, most instinctively respond “no”.

    If that is true, then the follow-up question is, “why do you continue to own what you own?”

    I know these are tough questions because they challenge our current way of thinking.  However, they’re incredibly important to your long-term investment results, and thus your level of financial independence. 
  • Confirmation Bias: Another destructive investor bias, closely related to this, is known as Confirmation Bias which occurs when you seek information that confirms your own preconceptions and beliefs. 

    What this leads to is avoiding, undervaluing, and even disregarding anything that conflicts with your preconceived beliefs.  Ultimately, it closes your mind to what could very well be the truth, and thus a valuable solution for you. 

    We’re all guilty of this to some degree in all facets of life.  We all like to watch the news stations that slant in the direction which we identify with. 

    The danger when investing is that this bias shuts off your ability to objectively evaluate your past decisions, and thus your results.  I see this all the time when folks spend wasted energy and time trying to justify and defend their past choices and decisions.  

Investing during your retirement years, when you have to rely on the Retirement Bucket™ of investments you’ve so carefully built up to support you, requires a disciplined “system” like our Relaxing Retirement Formula, so you can resist the temptation to follow the crowd and engage in these lines of thinking. 

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