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Monday, July 19, 2010

We're Not in Lake Wobegon

It is no big secret that, over the long term, individual investors do poorly. This is emphasized each year when Dalbar produces their annual quantitative analysis of investor behavior. They found for the 20 years ended in December 2009

" equity fund investors averaged 3.17% compared to 8.20% for buy-and-hold stock investors (S&P 500)."

Long term market observers understand that this is due to emotions coming to the forefront in major market moves and an over-weighting of recent events in expectations. This is nicely illustrated by William J. Bernstein in "The Investor's Manifesto". In fact, Berstein said

" I believe most folks are about as capable of managing their retirement portfolio as they are of flying their own airliners or taking out a relative’s appendix."

In the book he tells of a Gallup poll conducted before and after the 1987 Russian bond default. In the poll, investors were asked how they thought they would perform along with market performance. This was a period of strong returns interrupted by the Russian default.

Expected Returns

June 1998

September 1998

Next year, own portfolio



Next year, overall U.S. market



One needs to read Garrison Keillor, glance at the Dalbar findings above and look at the table all pretty much simultaneously to appreciate what is going on. There are a lot of investors apparently who believe they are above average.

Furthermore one wonders what such a poll would look like today. Bernstein points out that investors expect higher returns after prices have risen but common sense tells you that higher returns will result by buying in at low prices.
We're not in Lake Wobegon but investors just don't know it.


  1. Any article that references Bernstein is OK with me. But I think the quote misrepresented his thinking a bit. I've found that Bernstein suggests a basic asset allocation, rebalanced annually, is suitable for a self managed portfolio. Best regards, Barb

  2. To me Bernstein is just saying that most people are unaware of market history, let their emotions rule, and generally think backwards from what is required to perform well in the market. They are in the same boat as me and you if we had to remove an appendix.
    They are however capable of learning to manage their assets but that is a whole new ball game. This is interesting in that doctors (of which Bernstein is one) and lawyers are usually the worst! In their career they got ahead by studying, working hard, reading journals, attending conferences etc. This is how they became the "best" heart surgeon etc. They can do something that the most people can't do. Markets are different and this is what they can't grasp. You can march in the top analysts from Smith Barney etc. to construct a portfolio and a child can pick a portfolio that beats the "experts". This idea of market efficiency is tricky business! To me that is all Bernstein is saying.