Unless an investor had held an investment for more than a decade, they lost money in last year’s market collapse, according to a study released today by Dalbar Inc.
Wealth was wiped out across the board in equity, fixed-income and asset allocation investments, the Boston-based research firm found in its 15th annual analysis of investor behavior, said Dalbar president Lou Harvey.
For example, equity fund investors lost 41.6% last year, on average, compared to the Standard & Poor’s 500 stock index’s loss of 37.7%.
The study also included a “guess right” measure for investors. Last year, investors bought or sold investments at the right time (bought low and sold high) 42% of the time, while 58% of the time they made the wrong decisions, Mr. Harvey said.
Those were the lowest numbers since 2002, when investors made the right decision only 25% of the time. The second lowest year was 1989 with 33%.
“We made assumptions that investors had gotten smart about their investments,” Mr. Harvey said. “What we saw last year was the meltdown in September and October, and after that is when people started dumping their stocks. They suffered the loss and then realized the loss by selling.”
Meanwhile, long-term investors would have had to hold on to investments for more than 10 years to see any gains. Even still, the returns of long-term investments did not keep up with inflation. For example, for the 20 years ending Dec. 31, equity, fixed-income and asset allocation fund investors had average annual returns of 1.87%, 0.77% and 1.67% respectively. But, the inflation rate was an average 2.89% over the same time period.
In 2008, asset allocation funds posted an average annual loss of 30%. Bond funds lost 11.7%, compared with a gain of 5.2% for the
Barclays Aggregate Bond Index.
The underperformance of mortgage-backed securities had a significant impact on bond funds, the report said. “Funds were investing in them extensively and the index wasn’t recognizing them,” said Mr. Harvey
Advisers may encourage investors to use dollar-cost averaging to ease back into the market, the study said.
Investors also need to pay more attention to leverage, Mr. Harvey added.
“You cannot treat leverage as an esoteric measure,” he said. “Leverage is what the investment community has shut their eyes to for so long.”
The firm is also encouraging advisers to consider purpose-based asset management — a strategy of compartmentalization which recognizes that investors have varying levels of risk tolerances for different investment purposes.
“The approach identifies the multiple purposes each investor has and creates separate strategic ‘compartments’ for each,” the report said.
The goal of the approach is to mitigate investor’s bad behavior such as panic selling, the report said.
