Categories

Pragmatic Capitalism

Capital for Living a More Practical Life

Average Annualized Investor Returns

« Back to Previous Page
0

Roche, have you come across a source that has accurate average annualized investor returns that is NOT based on the flawed, self-serving and biased DALBAR studies showing it to be 2%ish which is obviously B.S. if more and more are passive investing. I’m getting tired of being the boy that cried wolf without having some more realistic data to back it up.

Marked as spam
Posted by MachineGhost
Posted on 05/03/2017 4:28 PM
111 views
Private answer

The Odean paper is the most famous source on this.

https://faculty.haas.berkeley.edu/odean/papers/returns/returns.html

That one shows that individuals do underperform the index and the more you trade the more you underperform. It doesn’t show that fund managers do better, but I actually suspect that the DALBAR study is close to being accurate there because fund managers generally hold a LOT less cash than individuals. So they beat the individuals mainly because they stay in the game, not because they make better decisions.

The Odean study was also close to that 2% figure showing that individuals underperform the index by about that margin. More when trading more….

When you combine this with the SPIVA scorecards it all shows that indexing is best when it’s done in a tax and fee efficient manner.

Marked as spam
Cullen Roche Posted by Cullen Roche
Answered on 05/03/2017 4:36 PM
    Private answer

    Thanks, that’s a paper I wasn’t aware of!

    But DALBAR isn’t claiming that the average investor underperforms by about 2%, but that they only earn about 2% a year!!! Without going into a lot of details (since I’m recalling from memory) they do this by conflating time-weighted and dollar-weighted returns, whereas an actual average investor would have received the former but they report the latter and cherry pick the starting date so it looks as bad as possible. DALBAR is an industry group that promotes active management.

    Marked as spam
    Posted by MachineGhost
    Answered on 05/03/2017 9:07 PM
      Private answer

      @Cullen

      Does monthly or annual investing into passive index funds count as “over-investing”?

      In my backtests of the S&P 500 between 1950 – 2017, just a single lump sum invested and held for 20 – 40 years always outperformed even the simplest of monthly/annual investing strategies. The total return for monthly/annually invested portfolios generally lagged by over 50% in the long run, despite more capital being accumulated than buy and hold! This roughly comes to between a 2 – 3% annualized return as opposed to a 7% annualized return for the S&P 500.

      Marked as spam
      Posted by Incognito 7
      Answered on 05/11/2017 12:37 PM
        Private answer

        Fewer transactions are almost always better because they reduce the costs along the way. If you can reinvest at no cost then that’s a no-brainer, but if you’re incurring costs along the way then it’s better to lump sum them annually or biannually.

        Marked as spam
        Cullen Roche Posted by Cullen Roche
        Answered on 05/11/2017 12:42 PM
          Private answer

          Edit: When I meant lagged by 50%, I meant this:

          $1000 invested in the S&P500 in 1950 and held until 2017 (assuming you’re still alive), yielded a Total Return of 15078%, Annualized return (CAGR) of 7.78%, or in real terms: $151,779.

          In contrast, $1000 invested annually in the S&P500 during the same period only yielded a Total Return of 1266%,
          Annualized return (CAGR) or 3.98%, or in real terms: $928,919.

          So even though more capital has been accumulated by annually investing, the total returns and annual returns have actually drastically declined compared to single lump sum investment.

          Marked as spam
          Posted by Incognito 7
          Answered on 05/11/2017 12:46 PM
            Private answer

            That’s similar to how DALBAR makes it flawed case, even though no one invests either way, e.g. no one lump sum invests all at once when they’re basically broke at the beginning of their career or only dollar cost averages just once a year (although that might be true for IRA contributions).

            Another overlooked factor is how much of your come you save is far more important than the return you’re getting on the savings. That is because your new savings contribution as a proportion of your existing investment balance is very likely to be a much higher a virtual percentage return than the actual long-term CAGR.

            And this is also why no one gets rich passively investing at the average return. They either get that way through decades of savings or they use more active methods to get higher returns.

            Roche was really prescient in calling “investing” as savings. Because that is what it really is. The investment return is just a bonus.

            Marked as spam
            Posted by MachineGhost
            Answered on 05/11/2017 2:10 PM
              Private answer
              Marked as spam
              Posted by MachineGhost
              Answered on 05/12/2017 6:09 PM
                « Back to Previous Page