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Most Investors Don’t Make What The Markets Deliver

FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
September 26, 2017

1. Investor Returns vs. Market Returns: The Failure Endures

2. Census: Americans Getting Richer Across Income Groups

3. New Census Bureau Data on Income, Poverty & Wage Growth

Editor’s Note

Due to the death of a family member on Friday (Mother-In-Law at age 99) and an out-of-town funeral late Monday, I was not able to do my usual reading and writing these last few days. As a result, I have included reprints of three articles I found interesting earlier this month.

The first is a new article from The Capital Spectator that summarizes the latest results from the annual Dalbar Studies – which once again found that investors acting on their own continued to earn far less than the market averages. I have written about this often in the past.

The second is an article discussing new Census Bureau data which found that Americans are getting richer across almost all income groups – very interesting. The third is another article based on new Census Bureau data showing how income and wages are growing while poverty continues to drop.

I hope you find them interesting. I’ll be back in the saddle tomorrow.

The Capital Spectator:

"Investor Returns vs. Market Returns: The Failure Endures

The inability of the crowd to earn anything close to Mr. Market’s performance is a hardy perennial. Although replicating market betas via low-cost index products has become child’s play, the persistent failure by most investors on this front is striking, as a recent study by Dalbar reminds.

The consultancy’s current annual study of how investor results stack up vs. markets is shocking, but it remains shocking year after year. Analyzing data for mutual funds and market benchmarks, Dalbar’s “ 23rd Annual Quantitative Analysis of Investor Behavior,” which reviews returns through the end of 2016, is a recurring study of how individuals generally are their own worst enemy when it comes to earning healthy returns.

“No matter what the state of the mutual fund industry, boom or bust,” Dalbar advises, “investment results are more dependent on investor behavior than on fund performance. Mutual fund investors who hold on to their investments have been more successful than those who try to time the market.”

Consider how the average equity fund investor has fared against the S&P 500 Index. For the trailing ten-year period through last year’s close, for instance, the US stock market earned an annualized 6.95%, or nearly double the investor return of 3.64%. Hefty gaps for other time periods are the norm as well, as the chart below shows.

Investor Returns vs. S&P 500

The difference is especially striking over the trailing 30-year period: The average equity investor earned a hair below 4.0% a year while the S&P deliver a bit more than 10%.

The numbers aren’t any better for bonds. Measuring investor returns for fixed-income funds vs. the Bloomberg Barclays Aggregate Bond Index also reveals a dramatic mismatch in favor of the benchmark. For the past decade through the end of last year, for instance, the bond index was ahead by an annual 3.97%, a huge edge over the weak 0.40% earned by the average fund investor.

“Investors so often cost themselves money because the behaviors elicited by short-term focus are almost always irrational,” the Dalbar study explains. “While many investors set a course of action that is based on a well-planned rationale and considers the full time horizon, those plans can take a back seat when fear or exuberance sets in.”

Perhaps the most compelling lesson in the data is that investors are in desperate need of informed investment counsel. Although some folks are earning reasonable, perhaps stellar, returns, the vast majority are wallowing in various degrees of subpar results…

The natural inclination for most market participants is to sell when ex ante performance rises (i.e., prices decline) and buy when ex ante return falls (prices rise). This may be rational if you’re managing a short-term momentum-based strategy with a tightly controlled risk-management process. But for investors with longer-term horizons it’s a recipe for disaster, as the Dalbar data shows.

Taking a more philosophical view suggests that there’s nothing unusual here and that the results are merely part of the natural order of finance. Recall that Professor Bill Sharpe advised that the search for alpha is a zero sum game. “Properly measured, the average actively managed dollar must underperform the average passively managed dollar, net of costs,” he wrote.

If you think of any advantages for portfolios (higher return and/or lower risk) via rebalancing vs. an unmanaged benchmark as alpha, a Sharpe-inspired view of strategy results implies that the ability to enhance risk-adjusted performance faces capacity limits. In short, there’s only so much rebalancing-related alpha to go around. To the extent that it exists at all, most of it (all of it?) is created by poor decisions via the majority of investors.

By that standard, a select group of investors will have no problem harvesting rebalancing-linked alpha for decades to come for a simple reason: The average investor shows little if any ability to learn from past mistakes.” END QUOTE

The Wall Street Journal:

“Americans Get Richer

The Latest Census Data Show Economic Gains Across Income Groups

September 13, 2017

Americans have received little good news lately, but a new U.S. Census Bureau report offers some economic hope: Last year real median household income rose 3.2%, the second consecutive increase, as 2.5 million Americans rose out of poverty.

These gains might not be notable late in an economic expansion save for the fact that real median incomes declined while poverty increased during most of the Obama Presidency. In 2014 the real median household income was $54,398, down from $55,683 in 2009. By contrast, during the Reagan expansion from 1982 to 1988, poverty fell 2.4 percentage-points while real household incomes rose $4,905.

Only in 2015 and 2016 did Americans experience real income growth. As a result, there are now about six million fewer people living in poverty than in 2014. Minorities have reaped the biggest gains. Between 2015 and 2016, the median income for blacks and Hispanics climbed 5.7% and 4.3%, respectively, compared with 2% for whites. As a caveat, the Census Bureau says a change in its survey methodology in 2014 could have increased incomes.

Liberals can’t credit welfare programs whose growth has slowed thanks in part to reforms imposed by Congress. According to the most recent data, the Social Security disability rolls fell by 25,000 in 2015 after growing by 1.3 million between 2009 and 2014. The number of food stamp recipients dropped by 3.4 million between 2013 and 2015. In 2014, 99 weeks of unemployment benefits finally ceased.

Money

Most of the recent income growth has been due to more Americans working—and Americans working more. Between 2015 and 2016, the number of people with earnings—i.e., income from employment—rose by 1.2 million. Meanwhile, the number of full-time, year-round workers increased by 2.2 million as many people moved out of part-time jobs.

Labor force participation hasn’t much budged since its nadir two years ago, but unemployment among minorities and less-educated workers has dropped sharply amid a tightening labor market. Job growth is a function of an improving economy and lower infra-marginal taxes on work as government welfare has been scaled back.

Liberals are bemoaning that the Gini coefficient, which measures income inequality, didn’t post a significant decline last year. But income inequality drops principally during recessions as the wealthy lose a larger share of their earnings than everyone else. As we learned in the Obama years, the preoccupation with inequality leads to economic policies that reduce growth, which leads to more inequality.

The left also overlooks that millions of middle-class Americans are moving into higher income brackets, as Mercatus Center researcher Dan Griswold points out. The share of Americans earning less than $35,000 (in real 2016 dollars) fell to 30.2% from 38.2% between 1967 and 2016 while the proportion earning more than $100,000 has roughly tripled to 27.7%.

All of this is worth celebrating, but more business investment and productivity growth will be needed to keep the expansion going and incomes rising. The most effective way would be for Congress to reform the tax code.” END QUOTE

Fortune Magazine:

"What New Census Data Tells Us About Income, Poverty and Wage Growth

by Grace Donnelly

New data from the U.S. Census Bureau showed good news for Americans in 2016: Household income is up, poverty is down, the gender pay gap narrowed, and healthcare coverage expanded.

This sunny outlook does come with a few clouds, though. Here are three trends in the data that put 2016 report in context.

The numbers are good, but still below pre-recession levels

Household income has increased for the second year in a row, but earnings growth is still slow. The wages Americans earn have not increased, rather income gains are being driven by rising employment levels and more combined paychecks in each household.

Income levels still haven’t returned to the levels seen before the financial crisis. Last year, median household income in the United States was $59,039 — lower than the $59,992 median in 2007 or the $60,399 median income in 2000 — based on calculations by the Economic Policy Institute using Census data.

Median Household Income

“I fully expect, with another year of strong growth in household income, we will be back to pre-2007 levels,” said Elise Gould, senior economist at EPI.

The percentage of Americans living in poverty has fallen for the second year in a row, but is still slightly higher than in 2007 and still 1.4 percentage points higher than in 2000.

Black and Latinx households saw the largest gains

[Editor’s Note: “Latinx” is a new politically-correct term to replace Latino (men) and Latina (women) so as not to suggest a gender when referring to them as a group. Jeez! What’s next?]

Income has grown fastest for Black and Latinx households for the second year in a row. Black households saw a 5.7% increase, while Latinx household income grew by 4.3%. Asian households saw a 4.2% increase and non-Hispanic white household income increased by 2%.

Median Household Income by Race

This narrowed the racial income gap between these households and their white counterparts. Black households now earn 61 cents for every dollar in a white household and Latinx households earn 73 cents on the dollar, up from 59 cents and 71 cents, respectively, in 2015.

Though poverty rates decreased in 2016, they remain highest for black and latinx households. The poverty rate dropped to 22% for black Americans and 19.4% for Latinx Americans — both significantly higher than the average U.S. poverty rate of 12.7%.

The growth is uneven across top and bottom earners

The rise in household income is being driven by job growth, but most of this new work is in low-paying positions. While incomes are increasing, lower income households aren't recovering as quickly.

The top 5% of earners are seeing their income grow the fastest, with median incomes 8.7% higher than pre-recession levels. The bottom fifth of the population has yet to reach pre-recession levels. Incomes for this segment of the population remain 2.7% below pre-recession incomes.

The EPI economists say one more year of normal income growth should restore incomes in the middle-fifth to their 2007 levels.”  END QUOTE

**  I’ll leave it there for today. I’ll be back home and back to my regular schedule tomorrow.

Wishing you the best,

Gary D. Halbert

BLOG: Odds For Meaningful Tax Cuts Have Improved Significantly

 


Read Gary’s blog and join the conversation at garydhalbert.com.

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