Investing by the Rear-View Mirror

All too frequently investors use the rear-view mirror to determine an investment’s attractiveness. An upward sloping price chart often automatically makes a stock more attractive. Recent performance helps determine a “good” manager. Past interest rate movements can cause changes to bond portfolio duration.

However, investing according to what seems obvious in the rear-view mirror has clearly had a detrimental effect on investors’ performance. Investors seem to consistently follow the unwise investment strategy of buying high and then selling low, and their performance over the past 10 and 20 years has accordingly suffered.

Hindsight might be 20/20, but investors have performed miserably by repeatedly attempting to time a market, a manager, or an investment. Future fundamentals, and not past performance, are more likely to dictate future returns.

2018 DALBAR data

The annual DALBAR study that estimates investors’ performance was recently released for 2018. Investor returns are calculated by DALBAR using the change in total mutual fund assets after excluding sales, redemptions and exchanges. This method of calculation captures realized and unrealized capital gains, dividends, interest, trading costs, sales charges, fees, expenses and any other costs. Each year RBA then analyzes DALBAR’s results to see how the “average investor” would have performed over the past 10 and 20 years. RBA compared the DALBAR returns with those of 43 different asset classes and sub- classes for the 20-year period ending 2018.

Trying to time their investments and ultimately buying high and selling low has effectively ruined investment performance. Chart 1 quantifies “ruined”. Investors underperformed nearly every category. Only Telecom Services and Commodities performed worse than individual investors over the past 20 years. Investors even slightly underperformed cash during the past 20 years, meaning they would have performed better if they had simply left their money in a money market account for the full 20 years!

Perhaps most important, individual investors didn’t outperform inflation (i.e., they had negative real returns). So, not only did investors underperform just about every asset class and sub-class by trying to time investments, but they also lost the purchasing power of their savings. In other words, they made themselves poorer.


Asset Class Returns Past 20 Years
(Annualized 12/31/1998 – 12/31/2018)

Source: Richard Bernstein Advisors LLC., Bloomberg, MSCI, Standard & Poor’s, Russell, HFRI, ICE BofAML, DALBAR, FHFA, FRB, FTSE. Total Returns in USD. *Average Investor returns are represented by DALBAR’s investor returns which represent the change in total mutual fund assets after excluding sales, redemptions and exchanges.