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DALBAR

The Measurement of Success

Compliments of
Russ Thornton
Thornton Wealth Management

QAIB 2008
Advisor Edition

Extract of
Quantitative Analysis of Investor Behavior 2008 ©
What investors really do ... and how to counteract it.

© 2008 DALBAR, Inc.

DALBAR, Inc. Federal Reserve Plaza Boston, MA 02210


Phone: 617-723-6400 600 Atlantic Avenue www.dalbar.com
Compliments of Russ Thornton
QAIB 2008

Introduction & Background

DALBAR's Quantitative Analysis of Investor Behavior (QAIB) has been


measuring the effects of investor decisions to buy, sell, and switch into
and out of mutual funds since 1984. The results have shown, to varying
degrees, that the average investor earns significantly less than mutual
fund performance reports suggest.

The goal of the QAIB study is to educate investors and the professionals
who advise them about the effects of investor behavior on the real
financial outcomes of an investment program.

QAIB 2008 examines real investor returns for equity, fixed income, and
asset allocation funds for the 20 years ended December 31, 2007. Whether
the mutual fund industry is enjoying rapid expansion in times of economic
boom, or is being battered by the bears, the key findings uncovered in
DALBAR's first study from 1994 remain true: Investment return is far
more dependent on investor behavior than on fund performance.
Mutual fund investors who hold their investments typically earn
higher returns over time than those who time the market.

© 2008 DALBAR, Inc. Past performance is no guarantee of future results.


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DALBAR, Inc. Federal Reserve Plaza Boston, MA 02210


Phone: 617-723-6400 600 Atlantic Avenue www.dalbar.com
Compliments of Russ Thornton
QAIB 2008

The Reality of Investor Returns

For years, mutual fund companies have been marketing their products
using the long-term results of a lump-sum investment. The results
typically show that the funds' annualized returns have outpaced their
designated benchmarks and inflation, implying that if investors purchase
fund shares and hold them for similar time periods, they may achieve
similar results.

Reality, however, is quite different from this scenario - and it's not the
fault of the fund companies. Based on an analysis of actual investor
behavior over the 20 years ended December 31, 2007, the average equity
fund investor would have earned an annualized return of just 4.48% --
underperforming the S&P 500 by more than 7% and outpacing inflation by
a mere 1.44%. Fixed income investors would have fared far worse, losing
their purchasing power by an average of 1.49% per year. Asset allocation
fund investors would have done a bit better, beating inflation by 0.41%
per year. Over shorter time periods, the results were far better for equity
fund investors. 1, 2

© 2008 DALBAR, Inc. Past performance is no guarantee of future results.


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DALBAR, Inc. Federal Reserve Plaza Boston, MA 02210


Phone: 617-723-6400 600 Atlantic Avenue www.dalbar.com
Compliments of Russ Thornton
QAIB 2008

Average Investor Annualized Returns vs. Inflation

20 Years 10 Years 5 Years 3 Years 1 Year


Equity 4.48% 5.66% 12.51% 9.61% 7.13%
Fixed Income 1.55% 0.93% 1.33% 0.56% 1.09%
Asset Allocation 3.45% 4.06% 6.62% 4.83% 2.73%
S&P 500 11.81% 5.91% 12.83% 8.61% 5.50%
Lehman Aggregate 7.56% 5.97% 4.42% 4.56% 6.97%
Inflation 3.04% 2.67% 3.03% 3.35% 4.08%
Data sources: Investment Company Institute, Morningstar Associates and Lehman Brothers

© 2008 DALBAR, Inc. Past performance is no guarantee of future results.


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DALBAR, Inc. Federal Reserve Plaza Boston, MA 02210


Phone: 617-723-6400 600 Atlantic Avenue www.dalbar.com
Compliments of Russ Thornton
QAIB 2008

Why are investor returns so markedly different from what fund companies
promote? Likely because of the following two reasons:

● Investors attempt to time their investments and redemptions -- and are


frequently unsuccessful.

●Investor holding periods, on average, are shorter than the periods


measured by mutual fund companies.

Market Timing and the "Guess Right Ratio"

DALBAR's Guess Right Ratio measures how often the average equity
investor correctly 'guesses' the direction of the market. In general, profits
are made when the Guess Right Ratio exceeds 50%, indicating that
investors must be right at least half the time in order to gain more than is
lost.3

An analysis of the 20-year period ended December 31, 2007, reveals that
equity investors were right more than wrong; however, the periods of
incorrect guessing had an impact on their portfolio (see chart, next page).
Perhaps not surprisingly, the Guess Right Ratio was highest (at least 67%
-- or 8 out of 12 months) during years when markets posted strong
returns and, with few exceptions, lowest during market declines. The
overall Guess Right Ratio for the 20-year period is 61%.1

Interestingly, during the period of 'irrational exuberance' in the late 1990s,


the Guess Right Ratio declined. Why? Perhaps because mutual fund
investors, overconfident in the rising tide of the tech sector, guessed
wrong as they moved assets away from the protection of diversified
mutual funds and into direct investments in dotcoms and telecoms.

© 2008 DALBAR, Inc. Past performance is no guarantee of future results.


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DALBAR, Inc. Federal Reserve Plaza Boston, MA 02210


Phone: 617-723-6400 600 Atlantic Avenue www.dalbar.com
Compliments of Russ Thornton
QAIB 2008

Data sources: Investment Company Institute and Morningstar Associates.

A: Typically, when the market's on the rise.

Observation: It's easier to make the right decision when markets are rising
and the fear of loss is on the back burner. The really smart decision is to
invest when the market is down.

© 2008 DALBAR, Inc. Past performance is no guarantee of future results.


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DALBAR, Inc. Federal Reserve Plaza Boston, MA 02210


Phone: 617-723-6400 600 Atlantic Avenue www.dalbar.com
Compliments of Russ Thornton
QAIB 2008

Buy and Hold? Not Necessarily

The second factor contributing to poor longer-term investor performance is


a less-than-ideal holding period. Despite the industry's best efforts to
educate investors about the potential benefits of a long-term investment
perspective, equity shareholders typically sell their holdings in less than
four years, while asset allocation fund shareholders may hold on for
another year or two. This indicates that regardless of their time horizons
and ultimate investment objectives (e.g., long-term growth), investors
may not have the patience or emotional wherewithal to weather market
dips.1

Data Source: Investment Company Institute

© 2008 DALBAR, Inc. Past performance is no guarantee of future results.


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DALBAR, Inc. Federal Reserve Plaza Boston, MA 02210


Phone: 617-723-6400 600 Atlantic Avenue www.dalbar.com
Compliments of Russ Thornton
QAIB 2008

Systematic Investing Can Reap Rewards

How can investors better pursue long-term returns that are comparable to
the marketing messages? One way is by following a dollar cost averaging,
buy-and-hold strategy. In all three types of mutual funds -- equities, fixed
income, and asset allocation -- the dollar cost averaging (or 'systematic')
investor would have fared better than the average mutual fund investor.

● For equity investors, the increase in appreciation would have been more
than 50% (see charts, page 9);

● For fixed income investors, the increase would have been 196% (see
charts, page 10);

● And for asset allocation investors, the difference in return would have
been 116% (see charts, page 11)!1, 4

Note all examples assume a total of $10,000 is invested over 20 years.

Observation: The illustrations on the following three pages demonstrate


the importance of consistency in wealth building. Moreover, the benefit of
dollar cost averaging can potentially be dramatically improved by
increasing contributions over time.

"Start early, keep contributing, and don't panic."

© 2008 DALBAR, Inc. Past performance is no guarantee of future results.


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DALBAR, Inc. Federal Reserve Plaza Boston, MA 02210


Phone: 617-723-6400 600 Atlantic Avenue www.dalbar.com
Compliments of Russ Thornton
QAIB 2008

© 2008 DALBAR, Inc. Past performance is no guarantee of future results.


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DALBAR, Inc. Federal Reserve Plaza Boston, MA 02210


Phone: 617-723-6400 600 Atlantic Avenue www.dalbar.com
Compliments of Russ Thornton
QAIB 2008

© 2008 DALBAR, Inc. Past performance is no guarantee of future results.


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DALBAR, Inc. Federal Reserve Plaza Boston, MA 02210


Phone: 617-723-6400 600 Atlantic Avenue www.dalbar.com
Compliments of Russ Thornton
QAIB 2008

© 2008 DALBAR, Inc. Past performance is no guarantee of future results.


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DALBAR, Inc. Federal Reserve Plaza Boston, MA 02210


Phone: 617-723-6400 600 Atlantic Avenue www.dalbar.com
Compliments of Russ Thornton
QAIB 2008

1
Average stock investor, average bond investor, and average asset allocation investor
performance results are calculated using data supplied by the Investment Company
Institute. Investor returns are represented by 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. After calculating investor returns in dollar terms, two
percentages are calculated for the period examined: Total investor return rate and
annualized investor return rate. Total return rate is determined by calculating the investor
return dollars as a percentage of the net of the sales, redemptions, and exchanges for the
period.
2
The equity market is represented by the S&P 500, an unmanaged index of common
stock. The bond market is represented by the Lehman Brothers Aggregate Bond Index.
Inflation is represented by the Consumer Price Index. Indexes do not take into account
the fees and expenses associated with investing, and individuals cannot invest directly in
any index. Past performance cannot guarantee future results. Data supplied by Lehman
Brothers and Morningstar Associates, LLC.
3
Note that this statistic is not dollar weighted so it cannot be used to measure returns.
4
The systematic equity investor examples use the S&P 500, while the systematic bond
investor examples use the Lehman Brothers Aggregate Bond Index. Data supplied by
Lehman Brothers and Morningstar Associates. Indexes do not take into account the fees
and expenses associated with investing, and individuals cannot invest directly in any
index. Systematic investing involves continues investing in securities regardless of price
levels. It cannot assure a profit or protect against loss during declining markets. Past
performance cannot guarantee future results.

© 2008 DALBAR, Inc. Past performance is no guarantee of future results.


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DALBAR, Inc. Federal Reserve Plaza Boston, MA 02210


Phone: 617-723-6400 600 Atlantic Avenue www.dalbar.com