An article published on Financial Standard today highlighted research contained in the CMC Markets Share Trader Insight Survey that showed investors had difficulty timing market entry and exit in the 6 months to July 2010. These results were based on the flow of cash which tended to flow into equities when the market was at its peak and flow out when the market was at a trough. The exact opposite to what an investor should be doing.
This actually comes as no surprise. Each year we keep an eye on the Quantitative Analysis of Investor Behavior report published by Dalbar Inc. This report looks at investor performance in the USA based on fund flows. The report has consistently found that over the long term, investors have achieved a much lower return compared to the relevant benchmark for an asset class. The latest report ,looking at the period up to the end of December 2009, found that over the previous 20 years investors have achieved a combined average return of 3.17% per annum from investing in US equities whereas the S&P500 over the same period has provided a return of 8.20% per annum. i.e. investors on average have under-performed at the rate of 5.03% per annum.
The reason for this under-performance can be put simply down as investors poorly timing entry and exit from the market, i.e. buying high and selling low.
The Dalbar report this year did contain some good news. Average investor returns for the one year were 32.20% compared to the S&P 500's 26.45%. Maybe investors in the US are now much better at getting in and out of the market. Somehow I doubt it.
The CMC Markets Share Trader Investor Survey provides timely reminder that an active approach to timing markets is extremely difficult.
At A Clear Direction we think that a much better way is to build structured portfolios for the long term and avoid the pitfalls of trying to time the market.