DALBAR Does It Again

That is not a spelling error for Dilbert, the widely popular comic strip about a micromanaged engineer trying to survive corporate America.  In early December 2018, I put out a slide deck called Thoughts on Markets to clients.  In that deck I referred to DALBAR, which we also do in our Form ADV, that document we give to all new clients that explains who we are, what we do and how we do it. 

DALBAR is a research firm that studies investor behavior.  Over and over, year after year, they find that investors who follow a basic, well-planned, well-diversified investment strategy routinely outperform those investors who are constantly changing their plan and investments, and reacting to markets and news in the short-run.  In a press release in March 2019, they found that most investors lost -9.42% vs. -4.38% for the S&P 500 index in 2018.¹  Their general conclusion was that investors likely sold near bottoms and didn’t participate in the recovery of the stock market (S&P 500) which is now trading near all-time highs.  Considering that I have been in this business since 1996, I have seen this kind of investment behavior over and over.

Most investors don’t want to invest near market bottoms, and when they feel conditions are good, they want to put money to work.  The problem is that market bottoms are the best times to invest, and when things are already going well, most of the positive returns have already happened.  You need to invest at periods of maximum uncertainty to achieve superior returns.   Otherwise, you get what the market gives you when you invest.  DALBAR’s research generally finds that most investors sell into weakness and buy long after market has recovered.  Consequently, their returns are not good.   

Conclusion:  Buy low, sell high.   Or sell high, buy low.  Not buy high, sell low.

¹ Dalbar, Average investor blown away by market turmoil in 2018, March 25th, 2019.

Image of Scott Adams By Tricia from Wikimedia Commins