Managed funds are popular way to invest in the share market. For a fee, you can have your investments managed by professionals. There are funds available to suit a wide range of investment strategies. Each managed fund has a mandate, which determines what type of investments they will use.
Some funds invest in only one asset class, such as fixed interest or property. Other funds invest a portion of their funds in each asset class. For the purpose of this article, we are focusing on funds which invest only in shares. There are hundreds of equity funds available. Investors can choose funds which focus on:
- International Shares
- Domestic Shares
- Smaller Companies
- Larger Companies
- Specific Sectors, such as banks
- Specific Criteria eg. Only invest in companies who are environmentally friendly)
We pay a fee to have our money invested by professionals. We all invest according to our personal goals and time frames. Our reasons for investing may differ, but we all have one thing in common: We want our investments to outperform the index, but, unfortunately most of us do not.
The 2015 Dalbar QAIB study has been released, and it has revealed that most of us do not beat the market. The study, which was first released in 1994, is a quantitative analysis of investor behaviour. It looks at how individual investors have performed over the 30 years since January 1984.
The data used for the Delbar study goes back to January 1984. It covers a 30 year period, which, we feel, accurately captures the modern investment era. In this time, we've seen, the crash of 87, the 2000 tech wreck, and the GFC. We've also seen the birth of home computing, the world wide web, and online investing.
The Dalbar QAIB Study shows that, over the last 30 years, investors in equity funds have substantially under performed the S&P 500 index. The table below shows how investors in equity funds did compared to S&P 500:
Why Can't Investors Beat the Market?
Reading the Dalbar Study has lead us to believe that the best strategy is to 'set and forget'. The more we try to trade the market, the more likely we are to lose money. The main reasons individuals under perform the index are:
- Lack of Capital
- Investor Psychology
These two factor create investment behaviors which result in below index returns. The Dalbar study has broken this down into investors behaviors.
Market Timing - Individuals tend to sell after a significant down turn (selling low). We tend to buy when markets are trending upwards (buying high). Time in the market, is more important than timing the market. Don't invest more than you can afford to lose, and don't panic. Your goal should be to buy and hold, or set and forget.
Unrealistic Expectations - Most of us will not beat the market. We are playing the game with large institutions, wholesale investors, and direct investors. Being above average means beating most of the players. Individual fund investors have less money, and are paying higher fees (per dollar invested). We are at a disadvantage from the start, rather than try to beat the market, we should set more realistic expectations. It doesn't help that our returns are diluted by fees charged by financial planners and stock brokers.
Loss Aversion - We all want high returns, but nobody wants to incur a loss. It is important that we understand that investing carries financial risk. If we want the chance of above average gains, we must also accept the chance of losses.
Access to Capital - Staying in the market requires discretionary income. Ironically our ability to invest is at it's lowest when the economy is bad, and markets are down and cheap. Rather than buying low, we need the money are are selling. Conversely, we tend to have more money when the economy is on the rise, and so are market prices.
What Should You Do to Improve Your Returns?
The Dalbar Study believes that the keys to successful investing are managing your expectations and staying invested. If you want to be a successful investor, don't be disappointed if you don't beat the index, and don't panic when markets fall.
A long term buy and hold strategy may feel like you are just a sheep in the herd, but why try and beat the market when you can bleat it? Would we be taking it to far if we suggested they rename it to the Dalbaaa Study?