Investor Education Is ‘Futile,’ ‘Totally Discredited’: Dalbar

[MachineGhost]

“Attempts to correct irrational investor behavior through education have proved to be futile. The belief that investors will make prudent decisions after education and disclosure has been totally discredited. Instead of teaching, financial professional should look to implement practices that influence the investor’s focus and expectations in ways that lead to a more prudent investment decisions.”?

...

“After enormous efforts by thousands of industry experts to educate millions of investors”? that Dalbar says have been “ineffective,”? the consulting firm recommends four key best practices for financial professionals: set expectations below market indexes, control exposure to risk, monitor risk tolerance, and present forecasts in terms of probabilities.

http://www.thinkadvisor.com/2014/04/07/ ... credited-d

[barrett]

Quote from the article:

So over the 30 years from QAIB’s inception to the 2013 market close — a period encompassing the crash of 1987 and subsequent market booms and busts — equity fund investors earned an average annual return of 3.69% compared with the S&P 500’s 11.11% return.

I have been trying to find out this statistic (the return that individual investors actually get in the stock market versus what everyone says they will get). Don't know how accurate this data is and the time frame is maybe a bit arbitrary, but it's certainly long enough to make a general conclusion. It's reflects my own track record fairly closely. But I still don't think that educating investors is totally impossible. It just takes too long when we consider that most people only have 30-40 years to accumulate a nest egg. Selling after the crash of 1987 (fortunately, I didn't have much money at that point) helped me ride out the 2008/early 2009 pain and I also managed to buy the dips of 2010 and 2011 successfully. So I believe I got better at investing but I still probably lagged the S&P. Also, it took me a couple of decades to really apply what I think I may have learned. Harry Browne said that investing in real estate is a bad idea unless you have 40-50 hours a week to really study that market. Ditto for stocks, I think.

And even when you think you know something, there is always so much damn noise that it makes it hard to believe in yourself. That is why I have joined the PP online support group, er... forum.

[Pointedstick]

We all bring our individual biases, states of mind, experiences, fears, goals, and desires to the mad world of investing. So some people are hopeless and some people aren't.

That said, it's probably hopeless to educate everybody.

[Tyler]

“After enormous efforts by thousands of industry experts to educate millions of investors”? that Dalbar says have been “ineffective,”? the consulting firm recommends four key best practices for financial professionals: set expectations below market indexes, control exposure to risk, monitor risk tolerance, and present forecasts in terms of probabilities.

I think this misses the point.  My personal hypothesis is that many people understand risk but always assume they'll end up in the winning column.  Like a young person saying "I invest aggressively in 100% stocks because I can afford to take more risk" but never really thinking through what that black swan event really means to their portfolio because they just assume that only happens to other people.  The fallacy of invincibility.

BTW, "industry experts" are also not immune to this.

[MachineGhost]

I think this misses the point.  My personal hypothesis is that many people understand risk but always assume they'll end up in the winning column.  Like a young person saying "I invest aggressively in 100% stocks because I can afford to take more risk" but never really thinking through what that black swan event really means to their portfolio because they just assume that only happens to other people.  The fallacy of invincibility.

BTW, "industry experts" are also not immune to this.

I don't think average people actually understand what risk truly is, until they actually suffer through it.  It's not helped by the chronic overvalution of stocks post-1987 so that literally no one in the Baby Boomer generation and below has experienced a 20-year bear market in real returns as is the historical norm.

Then again, those that participate in the financial markets aren't all there for funding retirement or life goals, but those people fill the left side of the bell curve.  Remember what they say about outrunning a bear in the forest.  Indexing is a pretty darn good way to be 2 standard deviations above the average and the PP makes it 2.5.  I'm personally shooting for 3 as I've got alot of lost time to make up for.