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Lies, Damn Lies and Statistics: Part 2 August 13, 2013

Posted by shaferfinancial in Uncategorized.
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Last post we explored the problem with using average rate of return.  Today we will discuss expenses and expected returns from individual investing.

The 30 year CAGR for the S&P 500 is currently 8.1%.  Bloggers, financial reporters, and Wall Street purveyors of mutual funds/ETFs like to point that out and indicate that individual investors would be able to mimic that result. What they don’t like to point out are the statistics on actual returns from individual investors using mutual funds/ETFs and asset allocation strategies.


Expenses exist in all financial strategies.  John Bogle on Vanguard Investments was an early proponent of the effect of expenses on total return.  He created mutual funds with lower expense ratio’s as a marketing tool to sell his mutual funds.  Since then, the idea of lowering expenses has taken a life of its own and now, for some, seems to be the primary point of analysis for investments.  

Despite this folks love to forget about the vast majority of expenses i.e. taxes. A recent study by Thornburg Investment Management outlined expenses for mutual fund investors.  Their figures were as follows:

.55%  Mutual Fund Expenses

1.03% Dividend Taxes

.37%  Capital Gains Taxes 

This totals up to 1.95%.  Let’s use 2% and not quibble about it.  Other studies have found that to be on the low side, but it really doesn’t matter to this discussion.

Now I am sure some of you are now thinking that you can avoid most of these expenses by putting your investments into a 401K/IRA.  I will leave that alone until the next post.

Actual Returns From Individual Investors

Why do all these bloggers and financial experts not use the data from actual returns individual investors receive?  Why do they like to use market returns instead?  Wouldn’t any discussion of investment strategies be better off starting with actual historic individual returns instead of theoretical individual returns? 

Anyone that is giving you advice on financial matters that starts to quote market returns to you is hiding the real results of their advise from you!

Because the real results from individuals is out there and easily found.

Probably the easiest to find is the Dalbar, Inc. study of investor behavior.  This is a company that produces reports for Wall Street and its agents [mutual fund/ETF sales people].  So there is a bias there for investing in mutual funds/ETFs.

Here are the last report’s results:

I will use the 20 year look back results.

S&P 500 CAGR 8.21%

Equity Investors 4.25%

Asset Allocators [they do not separate individuals from professionals]  2.29%

Fixed Income Funds  .98%

Their methods capture all dividends, capital gains, taxes, and expenses inherent in funds.  Remember, individual taxes are inherent to the individual so are not included.

So combining the 2 studies we have:

4.5% Return for Equity Investors

-1.4% in Dividend and Capital Gain Taxes

3.1% actual return for equity investors.

For Asset Allocators [most of the blogs seem to push this strategy]

2.29% CAGR

-1.4% Dividend and Capital Gains Taxes

.89% CAGR for Asset Allocators

Now you know why these folks don’t use REAL numbers!

Systematic Investing

For years the financial planning industry has told investors that by making systematic investments [usually monthly] that you actually increase your rate of return.  The Dalbar studies this year took at look at that theory.  Dalbar found that the average equity investor beat the average equity systematic investor by 33%.  The average systematic fixed income investor [bond investor] beat the average bond investor by 400%.  WOW, what is going on hear?

We have to delve into the psychology of investor behavior to explain all this, which is beyond the scope of this post [but I will post on this later].  But the simple explanation is that systematic equity investors are even more likely to adjust their investing based on emotion and buy high/sell low.  While those systematic bond fund investors stick with the system.

Using Statistics for Selling Investment Strategies

What are the conclusions we can draw from this?  

  1. The misuse of statistics is endemic in the industry;
  2. Most bloggers, finance writers, and industry salesmen are either too dumb to offer intelligent advice, undereducated in the field or attempting to deceive;
  3. Bloggers and finance writers who claim to be unbiased aren’t; and
  4. Free advice is really not free, but very costly.