In this post, I'm going to attempt to replicate these results using a somewhat different methodology. Without wading too far into this debate, I do believe that the critics make a strong case that the methodology is structurally flawed. You can read the most recent annual update to DALBAR's report here in the Quantitative Analysis of Investor Behavior report.Ī number of major flaws in the DALBAR methodology have been pointed out. The firm has continued to update this study annually. DALBAR estimated the "behavior gap" to be more than 4% per year, meaning that the average investor earned less than half of the returns of the investments they held. To do this, they used data from the Investment Company Institute (ICI) to track inflows and outflows of investor capital to mutual funds so they could estimate money-weighted rates of return, or how much an average investor within any given investment was likely to perform. But I digress.Īs a consequence, investor returns, in aggregate, have a tendency to significantly lag investment returns in aggregate since fewer dollars are in the market to participate on the way up than on the way down.īack in 1994, a research firm named DALBAR made a name for themselves by attempting to quantify the gap between investor returns and investment returns, which they termed the "behavior gap". Markets top because the last investor in the herd has piled in, and markets bottom because the laggards of the herd has exited. It's probably more accurate to reverse this implied causality. They have an uncanny ability to buy stocks near market tops and sell near market bottoms. It has long been noted that investors - individual and institutional alike - tend to be their own worst enemies. "We have met the enemy, and he is us" - Walt Kelly Contrarians can use inflows as a bearish signal and outflows as a bullish signal.
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