FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
December 7, 2021

IN THIS ISSUE:

1. Overview – The Dalbar Studies Revisited

2. What The Dalbar Studies Tell Us About Investors

3. I Was Shocked When I Learned This In The Mid-1990s

4. We Help People Get Off The Investment Roller Coaster

Overview – The Dalbar Studies Revisited

Most weeks, there are plenty of interesting topics to write about and lots of fresh news (economic and otherwise) to comment on. Sometimes I have a hard time deciding where to focus my attention. Other weeks, there might only be one or two topics I would consider writing about.

But then there are a few weeks each year (fortunately just a few) when there is virtually nothing going on of interest to me. When this happens, I go back to my archives and look through articles and topics I’ve saved in recent weeks and months, thinking I might write about them at some point. This is one of those weeks.

In looking back through my archives, I noticed there is one important topic I haven’t written about in several years which is a cornerstone of our business. That is the so-called “Dalbar Studies.” Many of our newer clients may not know what a pivotal role the Dalbar Studies played in our decision to form Halbert Wealth Management and get into the business of helping investors manage their portfolios.

So, I will revisit that story today.

In the mid-1990s, I ran across a publication called the Dalbar Studies. The Dalbar Studies show that the average stock market mutual fund investor consistently earns BELOW AVERAGE equity returns – meaning they earn less than what the market averages deliver.

And the gap between what most investors earn and what the market delivers on its own is quite large in most years. I’ll give you the exact performance numbers below. Prepare to be surprised if you have not seen these numbers before.

More importantly, the question is: Why do individual investors earn lower returns than the market averages deliver year after year? The answers may surprise you. I’ll discuss them in detail below. Let’s dive in.

What The Dalbar Studies Tell Us About Investors

Dalbar, Inc., the creator of the Dalbar Studies, provides unbiased evaluations of investment companies, Registered Investment Advisors, insurance companies, broker/dealers, retirement plan providers and financial professionals.

What Dalbar has become most well-known for over the years, however, has been its so-called Dalbar Studies in which it compares actual individual investor stock market performance with what the markets actually deliver on their own.

Now you would think most investors who invest in “index funds” (S&P 500, etc.) would make about what the market makes each year, give or take a little for differences in fund expenses, right? Well, actually, the answer is NO.

The fact is, the average stock mutual fund investor earns an average return WELL BELOW what the average equity fund delivers year after year. I first discovered this in the mid-1990s when I first saw the Dalbar Studies and was shocked at what I learned.

I’ll give you the performance numbers now, and then I’ll explain why this happens repeatedly:

For the 20 years ending December 31, 2020, the S&P 500 Index averaged 7.43% a year, while the average equity fund investor earned a market return of only 5.96%, according to Dalbar and others. That’s a BIG DIFFERENCE!!

This has been happening consistently for decades, so it’s nothing new. The question is obvious: Why are investors experiencing below-market returns year after year?

Is Wall Street cheating them somehow? No, that’s not possible. Are their brokers siphoning funds off of their accounts? No, that’s not happening either. So, how is this happening?

The truth is, investors are doing it to themselves!

The Dalbar Studies and others have shown that most individual investors in stocks and equity mutual funds tend to trade in and out of the market far too often for their own good. They unfortunately tend to trade in and out at the wrong times, often sacrificing profits and/or making losses worse.

We like to think most investors stay invested at all times – “buy-and-hold,” you know. But the Dalbar Studies and others show that many individual investors don’t stay fully invested at all times. Instead, many trade their accounts on a rather frequent basis, trying to time the market in an effort to improve their returns. Unfortunately, the opposite usually happens, and this drags down overall average returns, as documented above.

Most investors who trade their accounts don’t know the numbers I pointed out above. I suspect most know they are underperforming the market, but I doubt many know they are underperforming it by almost a THIRD on average?

I Was Shocked When I Learned This In The Mid-1990s

When I first came upon the Dalbar Studies in the mid-1990s, I was initially stunned. How, I wondered, could investors knowingly do this to themselves year after year? At the time, I was running my commodity futures funds and had no thought of expanding into more traditional investment products such as stocks.

Besides, my clients were mostly sophisticated, high net worth individuals who you would assume were very knowledgeable investors. But then I wrote about the Dalbar Studies in my newsletter and assumed my clients weren’t having such problems, I got a huge reaction!

Dozens of clients immediately called and wrote in to say that they, too, were Dalbar Study statistics. They, too, were experiencing sub-par equity returns. And they, too, were guilty of over-trading their accounts trying to beat the market. Needless to say, I was shocked!

As I said just above, we were totally focused on our futures funds in the mid-1990s, and I had no intention of expanding our services into more traditional investments like stocks or bonds. Yet when I learned many of our clients were struggling with sub-par equity returns, I felt a need to help them.

The skills we had developed to identify successful Commodity Trading Advisors would serve us equally as well if we were to expand into identifying successful equity fund managers. I asked our clients if they would like help in this area, and the response was overwhelming!

We immediately began to ramp up our business to include a search for successful equity managers. But I wanted to find equity managers who brought a different or unique strategy to the table, not just the usual suspects. This took some time and work.

We travelled all across the country visiting money managers and doing our serious due diligence on their programs. Eventually, we found an impressive list of manager candidates, and we presented our initial list to our clients, which was very well received.

That was the beginning of ProFutures Capital Management, Inc. which we subsequently renamed Halbert Wealth Management, and we have continued to build upon it ever since. We now have a dozen money managers we recommend to our clients, and between them, they have nearly 20 different investment strategies we offer to our clients. Most clients invest in multiple strategies to diversify. I have the bulk of my net worth invested with the money managers we recommend – always have – right alongside yours. I wouldn’t ask you to invest with money managers I don’t invest my own money with (not many managers in my position can say that!).

We Help People Get Off The Investment Roller Coaster

What I am most proud of in my financial career is the fact that we offer sophisticated investors a platform to be able to build an investment portfolio which is diversified among multiple strategies which are not correlated to each other and are not correlated to the stock market. Few investment firms can provide you with what we offer. I hope you appreciate that.

Some smaller financial firms have their clients concentrated with only one or two professional money managers. However, as noted above, we offer nearly 20 different investment strategies among a dozen different money managers to be able to offer broad diversification. And all meet our high standards for performance. Not to mention they are all high-quality firms with rigorous compliance standards.

Finally and most importantly, almost all of the investment strategies we offer are profitable most years. Sure, out of nearly 20 programs we recommend year in and year out, one or two lose a little money now and then. No one bats a 1,000 every year.

But I would put our nearly 20 programs up against anyone’s in the business any day, not that there are many firms with nearly 20 programs in the first place.

The bottom line is that I am so glad you found Halbert Wealth Management. We are a niche investment firm. We offer products and services you are not likely to find elsewhere. You can diversify your portfolio here to fit your particular goals and needs.

In closing, it makes me very proud to be in this position. And I sincerely thank you for being one of our clients. I’m grateful for the many wonderful clients we have, and I’ll keep working hard to keep us ahead of the curve in the future.

And finally, if you are reading this and you are not one of our clients, all I can ask is what’s holding you back? Are you getting better performance elsewhere than we offer? If not, I invite you to take that next step and open an account with us. I think you’ll be glad you did. If you are like the vast majority of our clients, you will add to your holdings with us in the future.

Become a member of the Halbert Wealth Management family today. And if you ever want to talk to me, I’m only a phone call away for our clients. I look forward to hearing from you.

Wishing you profits,

Gary D. Halbert

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Forecasts & Trends E-Letter is published by Halbert Wealth Management, Inc., a Registered Investment Adviser under the Investment Advisers Act of 1940. 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 the 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 advice. Readers are urged to check with their financial counselors before making any decisions. This does not constitute an offer of sale of any securities. Halbert Wealth Management, Inc., and its affiliated companies, its officers, directors and/or employees may or may not have their own money in markets or programs mentioned herein. Past results are not necessarily indicative of future results. All investments have a risk of loss. Be sure to read all offering materials and disclosures before making a decision to invest. 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.