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Why Most Investors Consistently Underperform The Market

by Gary D. Halbert

May 5, 2015


1. Dalbar Studies – Why Investors Make Less than the Market

2. Most Investors Are Not Good at Managing Money

3. The Benefits of Professional Active Management

4. Niemann Capital Management Has Beaten Market With Less Risk

Dalbar Studies – Why Investors Make Less than the Market

Long-time clients and readers will recall that for years I have been writing about the annual Dalbar Studies which compare the actual performance of mutual funds versus what the average mutual fund investor actually earns. You may also recall that the numbers are quite ugly – the average investor makes significantly less than mutual fund performance reports would suggest in both stock and bond funds.

The problem is not that mutual funds overstate their performance. The problem is that too many investors decide to switch into and out of mutual funds too frequently, in the hopes of boosting their returns. All too often, investors decide to sell the fund(s) they currently own, often at a low point, and switch into the latest hot performers, just before they hit a losing period. This practice too often results in selling low and buying high. I call it the “Mutual Fund Merry Go-Round.”

DalbarDalbar tracks the actual returns earned by investors by analyzing mutual fund purchases and redemptions throughout the year. So, let’s look at the Dalbar numbers for 2014 and for the last 20 years on average:

  • In 2014, the average equity mutual fund investor underperformed the S&P 500 by a wide margin of 8.19%. The broader market return was more than double the average equity mutual fund investor’s return – 13.69% vs. 5.50%.
  • As of 2014, the 20-year annualized S&P 500 return was 9.85% while the 20-year annualized return for the average equity mutual fund investor was only 5.19%, a gap of 4.66%.
  • In 2014, the average fixed-income mutual fund investor underperformed the Barclays Aggregate Bond Index by a margin of 4.81%. The broader bond market returned over five times that of the average fixed income mutual fund investor – 5.97% vs. 1.16%.
  • As of 2014, the 20-year annualized Barclays Aggregate Bond Index return was 6.20% while the 20-year annualized return for the average fixed income mutual fund investor was only 0.80%, a gap of 5.40%.

In summary, the average equity investor underperformed the S&P 500 by a gap of 8.19% in 2014 and an average annual deficit of 4.66% over the last 20 years. The average fixed-income (bond) investor underperformed the Barclays Aggregate Bond Index by 4.81% in 2014 and an average annual deficit of 5.40% over the last 20 years.

If you have not seen these Dalbar statistics before, you are probably shocked. So was I when I first saw them in 1994! What is most surprising is that there has been very little improvement in the numbers over the last 20 years.

Most Investors Are Not Good at Managing Money

After decades of analyzing investor behavior in good times and bad, and after enormous efforts by industry experts to educate millions of investors, bad decisions continue to be widespread. When discussing investor behavior, it is helpful to first understand the thoughts and actions that lead to poor decision-making.

Investor behavior is not simply buying and selling at the wrong times; it is the psychological traps, triggers and misconceptions that cause investors to act irrationally. It is that irrationality which leads to the buying and selling at the wrong times, which leads to underperformance. Put differently, many investors are their own worst enemy when it comes to investing.

As a result of these findings from Dalbar and other market research groups, there is a widespread belief, not only among most investors but also among many industry professionals, that it is nearly impossible to beat the market. But that is simply not true, as I will demonstrate below.

While many retail investors, and even many professional investors, are not very good at making investment decisions, there are some Registered Investment Advisors (RIAs) and other professionals that have been successfully investing in the markets for years.

Most successful RIAs (and other successful traders) use proprietary software that they have developed internally. Some use complicated algorithms that determine whether to be in the markets, or on the sidelines in the safety of cash. Many rely on multiple indicators within one strategy. 

Most of these actively-managed systems are designed to be in the markets (long) most of the time. However, at certain points, based on various risk measurements, the system may signal that risks outweigh any possible return potential. Systems vary widely of course and some may move only partially to cash, while others may be 100% in cash until market conditions improve.

The Benefits of Professional Active Management

Before I begin this section, let me state for the record that many active management systems, including some that are managed by professionals, don’t work. Since we founded Halbert Wealth Management (HWM) in 1995, we have looked at hundreds and hundreds of active managers, and I would venture that over 90% either weren’t successful or didn’t meet our rigorous standards.

However, there are some very successful active managers in the industry. Unfortunately, most investors don’t know how to find them. Fortunately, at HWM we know how to find and evaluate them, and we have the resources to continually look for them all across the country.

With that said, let’s move on to the benefits of active management. The first goal of any actively-managed strategy is to reduce risk. Moving partially or fully out of the market may allow one to miss some of the large downward movements and bear markets.

I have reprinted this table many times over the years. It illustrates very clearly why it is so important to avoid big losses in the markets.

Breakeven table

If you lose 20%, you must make 25% just to get back to breakeven. Lose 30% and you must make almost 43% to recover to even. Lose 40% and you have to make over 66% just to get back to breakeven. Lose 50%, as the S&P 500 did from late 2007 to early 2009, and you must make 100% to get back to breakeven.

As we all know, it took six years for the S&P 500 to recover to where it was when the financial crisis hit in late 2007!

The main problem with the traditional “buy-and-hold” strategy is that it subjects investors to very large losses from time to time. Sharp downward “corrections” occur fairly frequently, and we experience a serious bear market now and then. Most investors believe when they start out that they can be patient and hold on through these sometimes terrifying downturns.

Yet millions of investors panicked in 2008 and early 2009 and bailed out of the market, in many cases with huge losses. Most retirement accounts were devastated. As noted above, the S&P 500 Index plunged by more than 50% from late 2007 to the bottom in March 2009. Many investors vowed to never again put their money in stocks and have never gotten back in.

S&P 500 Index

Sadly, they missed the historic bull market that has unfolded since then.

Again, the primary goal of a successful active management strategy is to avoid some of those losses by moving partially or fully to cash (money market) and awaiting the next signal that the downturn is over before going back into the market.

In addition to missing the big downturns in the market, it is equally important to know when to get back in. It is just as important to catch most of the “up” days in the market. So active-management is all about knowing when to get out and when to get back in. Successful active-management strategies can do both. Here is an example for today’s discussion.

Niemann Capital Management Has Beaten Market With Less Risk

There are currently 11 professional active managers on our recommended list at Halbert Wealth Management, Inc. Most of our recommended managers invest in equities directly or via stock mutual funds and increasingly Exchange-Traded Funds (ETFs). In addition, we also have active managers that invest in bonds, including convertible bonds – which sadly most investors do not have in their portfolios (because they don’t understand them).

For today’s discussion, I have selected Niemann Capital Management which we have recommended continuously since 2001. Niemann offers multiple strategies but the one we recommend for most clients is called the “Risk Managed Program” which began investing in late 1996. Since its inception, Risk Managed’s annualized return has handily outperformed the S&P 500 Index with about half of the downside risk (as measured by drawdown).

Risk Managed’s objective is to exploit intermediate stock market trends while also seeking to limit risk. The strategy identifies those sectors of the market that are gaining momentum and invests in those areas using domestic equity ETFs.

Risk Managed typically holds 10 to 15 positions representing a broad universe of ETFs that Niemann’s proprietary strategy has determined to have the highest potential for gain. In downward trending markets, Risk Managed will move partially or fully to cash (money market), awaiting another uptrend. Risk Managed can be fully invested, partially in cash, completely in cash, or even partially short as a hedge against existing long positions. It will not go net short.

So, let’s take a look at the actual performance that Niemann’s Risk Managed Program has delivered over the last 18 years. It is important to note that all results shown below are NET of all fees and expenses, including management fees.

As you can see, Niemann’s Risk Managed Program has clearly beaten the S&P 500 since its inception. Best of all, Risk Managed (as its name implies) has delivered these returns with much less risk than if you had owned the S&P 500 Index, which plunged over 50% during the Great Recession.

How do we know the numbers shown above are real? They are compiled using rigorous industry standards and because I have my own money invested, which allows us to monitor performance on a daily basis. And as a reminder, the numbers above are net after fees and expenses.

CLICK HERE for more details on Niemann’s Risk Managed Program. As always, past performance is not necessarily indicative of future results. Be sure to read Important Notes and disclosures at the end.

The minimum investment for Risk Managed is only $50,000. Niemann also has another program that is similar to Risk Managed but also invests in bond and international funds – in case you are looking for offshore exposure. That program is the Niemann Global Opportunity Strategy.

Getting Started is Easy – Here’s How It Works

To invest in Niemann’s Risk Managed Program, you simply need to contact us (see below) and we will send you the forms to open an account at Fidelity Brokerage and give Niemann authority to make the investments in ETFs in your account.

You have complete transparency since you can monitor activity in your account daily (if you wish) on Fidelity’s website. You can also add to or close your account at any time as there is no lockup period.

In closing, I am very confident that many of you reading this would benefit from having a portion of your money in an actively managed account with Niemann Capital Management, and specifically in its Risk Managed Program. And remember that I have my own money invested with every money manager that we recommend.

If you have been reading me for years but have never become a client, I invite you to join us today. Please feel free to contact us in any of the following ways:

·  Give Phil Denney or Spencer Wright a call at 800-348-3601;

·  Send an e-mail to us at; or

·  Complete our Niemann online request form

Best regards,

Gary D. Halbert

IMPORTANT NOTES:  Halbert Wealth Management, Inc. (HWM) and Niemann Capital Management (NCM) are Investment Advisors registered with the SEC and/or their respective states. Some Advisors are not available in all states, and this report does not constitute a solicitation to residents of such states. Information in this report is taken from sources believed reliable but its accuracy cannot be guaranteed. Any opinions stated are intended as general observations, not specific or personal investment advice. Please consult a competent professional and the appropriate disclosure documents before making any investment decisions. Investments mentioned involve risk, and not all investments mentioned herein are appropriate for all investors. HWM receives compensation from NCM in exchange for introducing client accounts. For more information on HWM or NCM please consult HWM Form ADV Part 2, NCM Form ADV Part 2 and Niemann’s Annual Disclosure Presentation, available at no charge upon request. Officers, employees, and affiliates of HWM may have investments managed by the Advisors discussed herein or others.

As a benchmark for comparison, the Standard & Poor's 500 Stock Index (which includes dividends) was used. It represents an unmanaged, passive buy-and-hold approach, and is designed to represent a specific market. The volatility and investment characteristics of this Index may differ materially (more or less) from that of this trading program since it is an unmanaged Index which cannot be invested in directly. The performance of the S&P 500 Stock Index is not meant to imply that investors should consider an investment in this trading program, which is actively managed, as comparable to an investment in the “blue chip” stocks that comprise the S&P 500 Stock Index.   

Performance results are presented net of transaction costs and NCM’s actual management fees. NCM’s annual management fees may vary from 1% to 2.3%. Additionally, mutual funds, Exchange Traded Funds (ETFs) and variable annuities (“Funds”) charge various fees, all of which are disclosed in their prospectuses, along with any potential trading restrictions. Such fees are borne by the shareholders and reflected in the net asset value of the Funds. Some Funds also charge short-term redemption fees and excess transaction fees that are billed to shareholders. Clients pay these fees in addition to NCM’s advisory fees. In selecting Funds in which to invest client assets, NCM considers the nature and size of the fees charged by the Funds. NCM selects a Fund only if NCM believes the Fund’s performance, after all fees, will meet NCM’s performance standards. Consequently, NCM may select funds that have higher or lower fees than other similar Funds, and that charge special fees. When deciding whether to liquidate a Fund position, NCM will take into consideration any special fees that the Fund may charge. NCM may decide to sell a Fund position even though it will result in the client being required to pay Special Fees. In addition, overall performance may be affected by fees charged by the account custodian.

Historical performance includes all actual, fee-paying fully discretionary accounts managed by NCM in this strategy. Each composite does not accurately present the performance of any specific account, which depends on investment timing and weighting, among other factors, which vary from account to account. Individual account performance may differ from the composite. Each account included in the composite is added after it has been under active management for at least one full month. A closed account is included through the last full calendar month that it was actively managed. 

Through April 1, 2010, the performance does not include investment in exchange traded funds. Performance after that date may include investment in exchange traded funds and, as a result, may differ materially. These performance numbers have not been verified by HWM, and therefore HWM is not responsible for their accuracy. Statistics for “Worst Drawdown” are calculated as of month-end. Drawdowns within a month may have been greater. PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. Any investment in a mutual fund or ETF carries the risk of loss. An account with any Advisor is not a bank account and is not guaranteed by FDIC or any other governmental agency.

When reviewing past performance records, it is important to note that different accounts, even though they are traded pursuant to the same strategy, can have varying results. The reasons for this include: i) the period of time in which the accounts are active; ii) the timing of contributions and withdrawals; iii) the account size; iv) the minimum investment requirements and/or withdrawal restrictions; and v) the rate of brokerage commissions and transaction fees charged to an account. There can be no assurance that an account opened by any person will achieve performance returns similar to those provided herein for accounts traded pursuant to the Niemann Risk-Managed trading program.

In addition, you should be aware that (i) the Niemann Risk-Managed trading program is speculative and involves risk; (ii) the Niemann Risk-Managed trading program’s performance may be volatile; (iii) an investor could lose all or a substantial amount of his or her investment in the program; (iv) NCM will have trading authority over an investor’s account and the use of a single advisor could mean lack of diversification and consequently higher risk; and (v) the Niemann Risk-Managed trading  program’s fees and expenses (if any) will reduce an investor’s trading profits, or increase any trading losses.

Money market funds are not bank accounts, do not carry deposit insurance, and do involve risk of loss. “Annualized” returns take into account compounding of earnings over the course of an investment’s actual track record. The results shown are for a limited time period and may not be representative of the results that would be achieved over a full market cycle or in different economic and market environments.


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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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