July 2006: Investor Performance vs. Investment Performance


Would you rather have an investment program that provides entertainment, or one that provides good long-term investment results?

The media encourages investors to constantly focus on current events - their ratings (and profits) depend on it. After all, if they can’t compel you to watch their shows, read their publications, or view their websites, their advertising revenues suffer and they don’t make any money. This is the driving force behind "entertainment television." Their purpose really isn’t about educating viewers and helping them become better investors, it’s about captivating and holding their attention, that is, ratings.

In his book Expert Political Judgment, Philip Tetlock refers to "our uncontrollable need to believe in a controllable world." Financial entertainment media, especially television, meets that need. But is there any useful value to an investor?

Although the short term focus promoted by entertainment television succeeds at entertaining, it fails at helping viewers to become better investors. Fixating on the latest “news,” or the hot stock of the day, or the expert-of-the-minute, encourages short-term thinking that results in counterproductive investment behavior and inferior returns.

Perhaps that explains why investor performance badly trails investment performance. Dalbar Inc.’s 2006 edition of “Quantitative Analysis of Investor Behavior,” an analysis of how well stock fund investors fared for the 20 year period through 2005, concluded that investor returns were significantly worse than investment returns. Why? The returns investors actually experienced were more dependent on investor behavior than on fund performance. Although the average stock mutual fund posted an annual average return of about 11% during that period, the average stock mutual fund investor earned just 3.9% annually!

"The Dalbar study affirms that the average investor underperforms, by a wide margin, the average investment."

Poor behavior cost these investors a hefty price. It’s not the fault of the investments! It’s the investors! To paraphrase the NRA’s adage about guns, "Investments don't kill portfolios, investors kill portfolios."

The Dabar study affirms (and has annually since they began the report in 1984) that the average investor underperforms, by a wide margin, the average investment. From that we can logically deduce that returns for the average balanced fund investor also fall far short of returns for the average balanced fund investment (i.e. short of our benchmark, the Morningstar Moderate Allocation Category).

Although most investors say they are long-term investors, the Dalbar evidence proves most investors do not act like long-term investors and their counterproductive behavior costs them dearly. The bottom line is that the activities of most investors does not improve their investment results, it damages and detracts from their investment results!


Our job at Asset Allocation Advisors is to ensure that our clients do not fall prey to the investor vs. investment plight described by Dalbar. We would only need to obtain average investment results to do that, since the average investor underperforms the average investment. However, we chose to raise the bar even higher and set a goal of exceeding average investment returns. Our value proposition as your investment managers is to provide you with superior long-term investment results.

"Our value proposition as your investment managers is to provide you with superior long-term investment results."

Instead of focusing on today’s hot topics like the Federal Reserve’s next move, or the direction of energy prices, or quarterly economic growth estimates, we find that our efforts are better utilized (i.e., make you more money) by focusing on our investment strategy, the execution of and adherence to that strategy, mutual fund research and selection, and developing additional ways to improve our investment results and services.

Will this be entertaining to you? Probably not. Will it be effective? We believe it will. No one can predict the future and, of course, past performance does not guarantee future performance. However, actual results since improving our investment strategy strongly suggest we are on the right track and that our prospects for good long-term performance are excellent.

We appreciate the opportunity of being your investment advisors and look forward to the challenges ahead. ***

Greg Schultz & Bruce Grenke
© 2006 Asset Allocation Advisors, Inc.