IPB 065: According to DALBAR Average Investor Results Are Below Average

 

Over the last few years…basically since the beginning of the Insurance Pro Blog going back to the summer of 2011, we've been preaching the gospel of whole life insurance.

Sure, there have been plenty of people who've come along to tell us how wrong we are and how a simple investment in an index fund could certainly outperform the return on the cash value of a whole life insurance policy.

To this, we've never disagreed.

Yes, in fact, we too believe that a long term investment in stocks or equity funds of any kind should…outperform the return on cash in a whole life policy. But that's kind of like us all agreeing we'd live a much longer and healthier life if we only ate raw vegetables and less prime rib smothered in butter.

Data is one thing, human behavior is another altogether.

Our point is that while average annual returns for various index funds and the indices themselves look great, most people aren't able to achieve returns anywhere close to those numbers.

Here's a more detailed rundown of the key points from the DALBAR report:

  • In 2016, the average equity mutual fund investor underperformed the S&P 500 by a
    margin of 4.70%. While the broader market made gains of 11.96%, the average equity
    investor earned only 7.26%.
  • In 2016, the average fixed income mutual fund investor outperformed the Bloomberg
    Barclays Aggregate Bond Index by a margin of 0.19%. The broader bond market realized a
    slight return of 1.04% while the average fixed income fund investor earned 1.23%.
  • Equity fund retention rates decreased in 2016 from 4.10 years to 3.80 years.
  • Fixed Income retention rates increased by almost 2 months in 2016, from 2.93 to
    3.09, eclipsing the 3.0 year mark for the first time since 2012.
  • Asset allocation funds experienced the a significant decline of retention rates in 2016. The
    average retention rate shortened by over 5 months, decreasing from 4.53 to 4.09.
  • In 2016, the 20-year annualized S&P return was 7.68% while the 20-year annualized return for
    the Average Equity Fund Investor was only 4.79%, a gap of 2.89% annualized.
  • The gap between the 20-year annualized return of the Average Equity Fund Investor and
    the S&P 500 continued to contract in 2016 (from 3.52% in 2015 to 2.89% in 2016).

Just further proof that behavior rarely aligns with reality.

Psychology and emotion play a very large part in long term financial success. It's better to build a plan to “control the control-ables”. It's not sexy, it involves more planning and probably requires you to save more money because you're accepting a plan based on lower average returns.

But in the end, if you plan conservatively, and end up with more money, you'll be happier than if you over-project higher than average returns and miss your target. I've yet to have anyone complain that they had too much money.

You can't buy groceries with average annual returns. And averages also mean that half the people get less than average returns. How do you know you'll be average or better?

If we've done our job effectively and you feel like this is a concept that you'd like to explore for yourself, feel free to reach out to us, by contacting us here.


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