Dalbar publishes the Quantitative Analysis of Investor Behavior (QAIB) annually. In it, several claims are made, the most common of which is that the average investor consistently under-performs the market.
- How is it possible for the average investor to underperform the market? Isn't the market return the average of the returns on all shares of stock? Isn't every share sold by an investor sold to a different investor so the "average" investor always owns the same amount of stock in every company, since together, investors own 100% of the stock in every company?
- Does the study account for the return that the investor could be earning with the money they take out of the stock market? For instance, if it is used to pay down a 5% mortgage, the investor is implicitly making 5% and if it is used to start a business, the investor is making some return on the business venture.
- Does this result imply that markets are not efficient? Doesn't the fact that investors can consistently underperform the market by making poor decisions, imply that an investor could consistently outperform the market by making the opposite decisions?
Edit: A common response appears to be to suggest that "Average" here is population-weighted, not dollar-weighted. While this seems intuitive, it opens up two additional questions:
- Most institutional investors (banks, pensions, mutual funds) represent and pass on earnings to thousands or millions of individual investors? So, the "average joe" investor is actually part of several institutional investors. How would one account for this?
- How would the DALBAR collect the information on what the average investor does? Since individuals trade through brokers and don't want their trading info to be public knowledge, all DALBAR can see is the total bought and sold, not who did it. And DALBARs methodology doesn't seem to look at anything other than total volume, so how could they mean a population-weighted average?