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By Gary D. Halbert
December 16, 2003


1.  Surprising New Investor Survey.

2.  Many Investors Are Misinformed.

3.  Chasing The Latest “Hot” Returns.

4.  Why Investors Don’t Reach Goals.


On December 2, the National Association of Securities Dealers (NASD) released the results of a survey of over 1,000 known investors that was conducted earlier this year.  The survey asked some fairly basic, multiple-chooice investment questions, in the hopes of gleaning how knowledgeable most investors are, or are not.  The results were quite surprising and suggest the latter.   This week, we’ll look at several of the basic questions the NASD asked and the overall responses.  You may be surprised at the results.

Misinformed Investors

The NASD surveyed 1,086 people who were known to have made at least one investment recently.  The survey was sent to investors whose portfolios ranged from as little as $10,000 up to a maximum of $500,000.  Surprisingly (in light of the answers below), over two-thirds of the survey respondents (69%) described themselves as being at least “somewhat knowledgeable” about investing. Only 12% admitted to being “not at all knowledgeable.”  With that in mind, let’s look at some of the responses.

First, there was considerable misunderstanding as to the basic types of investments.  For example, 60% of respondents said they own stocks, yet 21% of survey respondents did not understand the concept of a stock.  While most understood that owning a stock means that you own a piece of the company, here was the real shocker: Almost half of the respondents believed that stocks are insured against losses! 

To be fair, the question was somewhat “loaded” in that the survey listed several organizations (SIPC, FDIC, etc.) and asked, “Which of the following organizations insures you against your losses in the stock market?” Again, nearly 50% of the survey respondents thought that their stock market losses were insured!   The correct answer was NONE of the above. 

Likewise, 70% of the survey respondents did not understand that when one buys stock on “margin,” he or she can lose ALL of the investment, even if the value of the shares does not go to zero.  When investors buy stocks on margin, using loans from their brokerage firm and putting up the securities they buy as collateral, they can potentially lose all the money they paid for the stocks, but also the amount they borrowed.  Purchases of securities on margin jumped 25% in the first seven months of this year according to the NASD.

Regarding mutual funds, the results weren’t any better.  While 60% of respondents said they own mutual funds, 80% did not know the definition of a “no load” mutual fund.   The survey also suggested that many investors do not know the difference between loads (sales charges) and normal operating expenses of mutual funds.

So, how about bonds?  29% of respondents did not understand the concept of a bond.  60% did not understand that if interest rates rise, most bonds lose money.  Only about half of the respondents knew the definition of a “junk bond.”  Almost 70% of the survey respondents did not understand why municipal bonds offer lower pre-tax yields.

Unreasonable Expectations For Returns

The NASD survey asked several questions about what level of long-term returns (performance) was expected. One such question asked, “What is a reasonable average annual return that can be expected from a broadly diversified U.S. stock mutual fund over the long run?” 21% answered that they expected returns of 15-25% annually.  Only 40% chose the more reasonable answer of 10%.

Only 51% of the survey respondents knew that stocks have yielded higher average returns than most other investments over long periods of time.  Second, a surprisingly large percentage of survey respondents (28%) did not understand that, in general, certain investments which have higher risks have the potential to provide higher returns over time than investments with less risk.

Overall, only 35% of respondents scored a passing grade on the NASD survey.  97% admitted they needed to be better educated about investing.

Finally, the NASD did provide a breakdown on which groups fared best in its survey.  The notable findings are: older respondents (50+) did better than younger (21-29) respondents; men did better than women; higher income ($100,000 and greater) did better than lower income (less than $50,000); and primary decision-makers did better than shared decision-makers.

Chasing The “Hot” Funds

Various studies have shown for years that the “average mutual fund investor” does not make what the actual mutual funds make. Let me explain. If you bought and held a mutual fund for five years (with no additions or withdrawals in the account), then you would make exactly what the fund made over that period. If it made 50% over that period, and you held it the whole time, then you would have made 50%. But most investors don’t buy and hold a fund for five years, or even 2-3 years.

Most investors are on what I call the “Mutual Fund Merry Go-Round.” They buy and sell their mutual funds (or stocks) frequently, often several times a year, and usually because they get so much conflicting advice in the media and elsewhere, and because  they are continually chasing the latest “HOT” funds.

The problem with chasing the latest hot funds is that they can go cold - or lose money - just as quickly as they got hot. Many investors buy hot funds only to see them under-perform or lose money.

Sometimes funds are the victims of their own success. Being one of the “hot” funds attracts a lot of investor money. Some funds grow so large that the manager and/or the system can’t continue to produce the big returns, and may even lose money. There are several other reasons why hot funds can go cold in the future.

The Dalbar Studies

One of the most widely followed sources for this kind of information is Dalbar, Inc., a market research firm in Boston. Periodically, Dalbar publishes a study which shows what the average stock and bond mutual funds made (performance) versus what the average investor in those same funds made. The results are surprising! To illustrate, I will use a good period in the stock markets. The following numbers from Dalbar represent diversified stock mutual funds, which tend to track very closely on average with the S&P 500 Index, and bond/fixed income funds, which tend to track closely with the long-term Government Bond Index. Read these numbers closely.

In the period from 1984 to 2000, the S&P 500 Index gained 16.3% on average per year; however, the average investor in stock mutual funds gained only 5.3% on average during that same period. Surprised??

In the same period, 1984-2000, the long-term Government Bond Index gained 11.8% on average per year; however, the average investor in bond mutual funds gained only 6.1% on average. 

The problem is, most investors jumped around from fund to fund during that period, often buying high and selling low. Yes, the investors who bought the average stock funds and/or bond funds, and held them for that entire period, made roughly what the market indexes made: 16.3% on average for stock funds and 11.8% on average for bond funds. But most investors didn’t. Due to bad timing, they didn’t make nearly as much as the average funds. And this was during the greatest bull market in history for stocks!

Lousy Timing
In the case of stock mutual funds, the average investor made less than a third of what the funds made on average. In the case of bond funds, the average investor made only about half what the funds made. I don't know about you, but I was shocked when I first began to look at Dalbar’s (and others’) numbers on this in the early 1990s! I had no idea that investors, as a group, were jumping from fund to fund to fund so frequently, and with such disastrous results.

Does this sound like you? If it does, don't be embarrassed. Here’s why. The fact is, most investors do not have good timing when it comes to picking stocks and mutual funds.  We have a tendency to buy things when they are hot, not when they are out of favor. In most cases, it should be the other way around.

As noted above, I have thousands of investment clients all across America. Most are “accredited investors,” meaning that they have net worth of at least $1,000,000 (not counting their home, autos, etc.). In all these years, I don't remember a single client telling me that they made most of their wealth from their investments. No, in most cases, they became wealthy as a result of their primary business or occupation.

If you have a successful business, you know that it took a lot of hard work, a lot of experience and a lot of good decisions. Investing successfully is no different! I have never understood how prosperous businessmen and women think they can be successful investors right off the bat, without lots of hard work and experience. The Dalbar numbers above certainly indicate that most investors are not getting the results they hoped for!

Using Professionals To Your Advantage

As I have written before, I am a firm believer that most people would be better off if they used professional money managers to direct their investments. The Dalbar numbers above, the latest NASD survey and similar studies certainly back me up.

When I say “professional money managers,” I am not referring to your stockbroker.  Specifically, I am talking about Registered Investment Advisors and professional fund managers. There are successful Investment Advisors, with proven performance records, that can direct your investments in stocks, bonds, mutual funds and in other areas.

Many people think you have to be “wealthy” in order to access successful money managers. Some might tell you that, but the truth is, there are some very successful Investment Advisors who will accept accounts as small as $25,000-$100,000. You don't have to be a millionaire to have your portfolio managed by a successful professional.

There are thousands of Registered Investment Advisors in the US. Some specialize in selecting individual stocks; some specialize in stock mutual funds; and some specialize in bonds and/or bond mutual funds. They determine the stocks, bonds and/or mutual funds - out of thousands - to be in, and when to be in them. You get to continue to focus on your primary business or your retirement or whatever you wish, while your professional money managers are intensely focused on the markets and making you money.

How Do You Find Them?

If you have read my weekly E-Letters for long, you know that my company – ProFutures Investments – specializes in tracking and monitoring a large number of professional money managers.  We continually look for successful Investment Advisors to recommend to our clients.  By the way, I invest my own money with every manager we recommend.

You can try to find these top-rated professionals on your own, but it is very expensive to do it right.  We spend hundreds of thousands of dollars searching for good money managers all across the country (and even in some foreign countries).

Most (but not all) of the money managers we recommend use mutual funds as their investment vehicle.  We have managers who specialize in equity mutual funds, and others who specialize in bond funds of various types.

I happen to favor managers who will occasionally get out of the market, either partially or altogether, if their systems indicate a bearish trend.  Yet we also have managers and programs that are fully invested at all times. 

Our list of recommended managers ranges from conservative to moderate to aggressive in terms of their investment styles and objectives.  We try to match our clients with those managers who best fit their investment goals and risk tolerance.

Think About It Over The Holidays

The overriding theme I have heard from prospective investors this year goes like this: “I lost a bunch of money in the bear market, but I didn’t get back in to catch the huge rise in stocks this year, and now I’m afraid to do anything.”

If you are in this position (or even if you’re not), I would strongly recommend that you consider using professional money managers for at least a part of your investment portfolio.  Let them decide when to get back in the markets, and which markets to be in.

This is the time of year when most of us review our investment portfolios.  If you are not making the returns you desire, call us at 800-348-3601, and we can help you put the power of professional management in your portfolio.  You can also CLICK HERE to visit our website.

Season’s greetings,

Gary D. Halbert


Dean shoots off mouth once again after capture of Hussein.

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Forecasts & Trends E-Letter is published by Halbert Wealth Management, Inc. Gary D. Halbert is the president and CEO of Halbert Wealth Management, Inc. and is the editor of this publication. Information contained herein is taken from sources believed to be reliable but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgement of Gary D. Halbert (or another named author) and may change at any time without written notice. Market opinions contained herein are intended as general observations and are not intended as specific investment advice. Readers are urged to check with their investment counselors before making any investment decisions. This electronic newsletter does not constitute an offer of sale of any securities. Gary D. Halbert, Halbert Wealth Management, Inc., and its affiliated companies, its officers, directors and/or employees may or may not have investments in markets or programs mentioned herein. Past results are not necessarily indicative of future results. Reprinting for family or friends is allowed with proper credit. However, republishing (written or electronically) in its entirety or through the use of extensive quotes is prohibited without prior written consent.

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