The latest DALBAR annual study (2011) into investor behaviour in the United States reminds us of the less than optimal outcomes generated by investor behaviour. The study looks at the inflows and outflows of cash from managed funds in the US and through this analysis identifies the actual returns being generated by investors as opposed to the index return.
This years report indicated that for the past 20 years to the end of December 2010 the equity investor achieved a return of 3.83% per annum whilst the market provided a return of 9.14%. This shows that investors gave up 5.31% per annum.
T%he story was similar for fixed income investors with them earning 1.01% per annum over the same 20 year period whilst the index return a much healthier 6.89%.
The study also looked at retention rates, the period of time that investors held on to particular investments, with this rate lengthening slightly in 2010 but still only 3.27 years. The writers conclude this is less than optimal.
The conclusion from the writers of the report is that investor behaviour is the key cause of the sub-optimal performance.
The study should remind us of the danger of trying to jump in and out of investments. Most investors get this timing wrong.
I believe a better approach is to hold on to investments for the long term but build in protection to your portfolio by holding significant amounts of defensive assets (cash & high quality fixed interest) where appropriate.