Indices v. Investors

Investors, left to their own devices, can work against their long-term interests.

When people react with emotion they tend to make snap decisions that don’t always work in their favor. In my experience, Human nature is a terrible investor.

If you look at the chart below at the 10-year returns ending in 2018 and compare the equity index to the average equity investor you can see that the index outperformed the investor by 3.46%. This means that due to the human behavior of the investor they missed out on 3.46% of additional returns.

courtesy of Dalbar Inc.

Source: “Dalbar 2019 QAIB Report,” DALBAR, Inc.

Equity benchmark performance example is represented by the Standard & Poor’s 500 Composite Index, an unmanaged index of 500 common stocks generally considered representative of the U.S. stock market. Bond benchmark performance example is represented by the Bloomberg Barclays Aggregate Bond Index, an unmanaged index of bonds generally considered representative of the bond market. Indexes do not take into account the fees and expenses associated with investing, and individuals cannot invest directly in any index. Past performance cannot guarantee future results. Average stock investor and average bond investor performance results are based on a DALBAR study, “Quantitative Analysis of Investor Behavior (QAIB), 2018” DALBAR is an independent, Boston-based financial research firm. Using monthly fund data supplied by the Investment Company Institute, QAIB calculates investor returns as the change in assets after excluding sales, redemptions, and exchanges. This method of calculation captures realized and unrealized capital gains, dividends, interest, trading costs, sales charges, fees, expenses, and any other costs. After calculating investor returns in dollar terms, two percentages are calculated for the period examined: Total investor return rate and annualized investor return rate. Total return rate is determined by calculating the investor return dollars as a percentage of the net of the sales, redemptions, and exchanges for the period.

A similar comparison of the returns of the fixed-income index and the average fixed-income investor you can see a behavioral loss of 2.78%

The short and simple realization is that it is always best to set a plan and stick with it. None of us know what the market is going to do and at times it can be hard to ride it out with a “wait and see” attitude. But, when you look at the performance of the indices you can see that without the aspect of human nature they typically produce better returns.

The Power of Diversification

Another problem investors encounter is the inability to see the benefits of diversification over the long-term.

people behave badly

Source: Morningstar as of 12/31/18. Past performance does not guarantee or indicate future results. Diversified Portfolio is represented by 40% S&P 500 Index, 15% MSCI EAFE Index, 5% Russell 2000 Index, 30% Bloomberg Barclays U.S. Aggregate Bond Index, and 10% Bloomberg Barclays U.S. Corporate High Yield Index. Index performance is for illustrative purposes only. Indices are unmanaged and one cannot invest directly in an index. Diversification does not guarantee a profit or protect against a loss in a declining market.

When looking only at the short time periods in the chart above you can see that some time periods had gains and some had losses. But, the bigger picture is to also consider the diversified portfolio versus the S&P 500 Index. Not only did the diversified portfolio have a total return, but it also had a greater total return.

The moral of the story is to be patient and diversify. To what degree depends on your comfort for risk and the length of time you have to reach your goals.

If you want to set up a time with me to examine your personal situation give me a call to set up your appointment.

Joseph F. Falbo, CFP®, AIF®, CRC® is an independent LPL financial advisor that helps grow and preserve clients’ wealth using cutting edge, customized, and comprehensive strategies. With over two decades of experience, Joe helps clients to pursue and retain the lifestyle they want in retirement. To discuss your retirement goals or any financial topic you want, schedule a 20-minute complimentary call. To learn more about Joe, please visit

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

All investing involves risk including loss of principal. No strategy assures success or protects against loss.

Past performance is no guarantee of future results. Indexes cannot be invested into directly.

The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure the performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.