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Home>Why investors -- and advisers -- need to question myths about their performance

Why investors -- and advisers -- need to question myths about their performance

Why investors -- and advisers -- need to question myths about their performance

09/28/2017

By Michael Edesess

The advice investors get from financial advisers is heavily burdened by mythology. That mythology includes many unproven, and unprovable, claims, among them that such strategies as portfolio rebalancing (The%20advice%20investors%20get%20from%20financial%20advisers%20is%20heavily%20burdened%20by%20mythology.%20That%20mythology%20includes%20many%20unproven,%20and%20unprovable,%20claims,%20among%20them%20that%20such%20strategies%20as%20portfolio%20rebalancing,%20harvesting%20tax%20losses,%20and%20dollar-cost%20averaging%20can%20appreciably%20increase%20wealth%20accumulation%20without%20risk.), harvesting tax losses (The%20advice%20investors%20get%20from%20financial%20advisers%20is%20heavily%20burdened%20by%20mythology.%20That%20mythology%20includes%20many%20unproven,%20and%20unprovable,%20claims,%20among%20them%20that%20such%20strategies%20as%20portfolio%20rebalancing,%20harvesting%20tax%20losses,%20and%20dollar-cost%20averaging%20can%20appreciably%20increase%20wealth%20accumulation%20without%20risk.), and dollar-cost averaging can appreciably increase wealth accumulation without risk.

These myths let financial advisers position themselves as fiduciaries merely by repeating them to their clients. But now -- and at long last -- one of the most damaging of these myths has come into serious question.

Every year since 1994, a research firm called DALBAR has released its annual "Quantitative Analysis of Investor Behavior," repeating time and again the claim that investors substantially underperform the investment vehicles they invest in by trading them at the wrong times. (So, for example, underperforming the S&P 500 over a given period would be attributed to bad trades in and out of different index funds.)

DALBAR's report has been in high demand among financial advisers, who use it explain to prospective clients how they invest badly and need help.

Recently, financial planning expert Dr. Wade Pfau, a professor at The American College of Financial Services, explained the problem with DALBAR's calculation method (https://www.advisorperspectives.com/articles/2017/03/06/a-warning-to-the-advisory-profession-dalbar-s-math-is-wrong). I subsequently discussed it at length with Louis Harvey, DALBAR's CEO, who disputes Pfau's characterization of the methodology (and mine). Unfortunately, our discussion didn't convince me to change my mind.

Read: Beware investment products so complicated it's hard to even tell if they're bad (http://www.marketwatch.com/story/beware-investment-products-so-complicated-its-hard-to-even-tell-if-theyre-bad-2017-08-07)

Let's show, in simple terms, what DALBAR has been doing. It boils down to its method for calculating investors' returns, which Pfau generated through his work and I replicated.

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