Bad investor behaviour or bad math? - MoneySense

Bad behaviour or bad math?

A popular research study on investor behaviour comes under attack. Plus a look at the latest Safer Canadian Dogs


Wade D. Pfau, the professor of retirement income at The American College, recently fired a broadside at DALBAR’s annual research study on the “Quantitative Analysis of Investor Behavior”. The professor claims the study is deeply flawed.


Safer Canadian Dogs

That’s a problem because the research is regularly highlighted by advisors and the media. Pfau says that, “The study is meant to educate investors about how the returns they earn generally lag behind the returns for market indices widely reported in the media. The study analyzes the sources of poor investor performance, finding that the bad timing behaviour of buying high and selling low is the main culprit, along with fund expenses, the need for cash and a lack of cash to invest.”

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You may be familiar with the flavour of the findings. For instance, DALBAR found that the average equity fund investor gained an average of 4.7% annually over the 20 years through to the end of 2015. The S&P 500, on the other hand, gained an average of 8.3% annually over the same period. The difference between the two is quite dramatic and is commonly interpreted to be the result of bad timing by investors.

Problem is, according to Pfau, “Investors may behave badly. But the DALBAR study does not demonstrate this empirically. Its calculations are wrong and the financial services profession should stop using it as a way to market the value of financial advice.” He lays out the details in a starkly-titled paper called “A Warning to the Advisory Profession: DALBAR’s Math is Wrong”.

A core issue revolves around the calculations of, and difference between, time-weighted and money-weighted returns. I’ve written about the two return calculations in recent months. See:

One problem with the recent introduction of money-weighted returns on Canadian brokerage statements is the temptation to compare them to the time-weighted returns of market indexes or other investments. Comparing money-weighted returns to time-weighted returns is fraught with danger and can lead to highly erroneous interpretations.

But Pfau contends that DALBAR didn’t calculate the average returns of equity fund investors correctly and that theses results were then compared to the index’s time-weighted returns.

You should be aware that DALBAR disputes the professor’s analysis and the firm’s response is included at the end of Pfau’s article. Read both and decide for yourself on the merits of their arguments.

Safer Canadian Dogs

Investors following the Dogs of the Dow strategy want to buy the 10 highest yielding stocks in the Dow Jones Industrial Average (DJIA), hold them for a year, and then move into the new list of top yielders.

The Dogs of the TSX works the same way but swaps the DJIA for the S&P/TSX 60, which contains 60 of the largest stocks in Canada.

Not a dog person? Check out Norm Rothery’s new Climbing CATS (Cheap and Thrifty Stocks) » 

My safer variant of the Dogs of the TSX tracks the 10 stocks in the index with the highest dividend yields provided they also pass a series of safety tests, such as having positive earnings. The idea is to weed out companies that might cut their dividends in the near term. Just be warned, it’s a task that’s easier said than done.

Here’s the updated Safer Dogs of the TSX, representing the top yielders as of March 28. The list is a good starting point for those who want to put some money to work this week. Just keep in mind, the idea is to hold the stocks for at least a year after purchase – barring some calamity.

Name Price P/B P/E Earnings Yield Dividend Yield
BCE (BCE) $59.00 3.8 17.72 5.64% 4.86%
TELUS (T) $43.15 3.22 20.85 4.80% 4.45%
CIBC (CM) $116.31 1.97 9.87 10.13% 4.37%
Shaw (SJR.B) $27.51 2.47 12.23 8.18% 4.31%
Power (POW) $31.35 1.13 13.41 7.46% 4.27%
National Bank (NA) $55.98 1.9 14.07 7.11% 4.00%
Bank of Nova Scotia (BNS) $78.36 1.79 13.17 7.59% 3.88%
TD Bank (TD) $65.13 1.8 13.48 7.42% 3.68%
Agrium (AGU) $127.11 2.11 22.91 4.36% 3.68%
Fortis (FTS) $44.07 1.36 23.3 4.29% 3.63%

Source: Bloomberg, March 28, 2017


Price: Closing price per share

P/B: Price to Book Value Ratio

P/E: Price to Earnings Ratio

Earnings Yield: Earnings divided by Price, expressed as a percentage

Dividend Yield: Expected-Annual-Dividend divided by Price, expressed as a percentage

As always, do your due diligence before buying any stock, including those featured here. Make sure its situation hasn’t changed in some important way, read the latest press releases and regulatory filings and take special care with stocks that trade infrequently. Remember, stocks can be risky. So, be careful out there. (Norm may own shares of some, or all, of the stocks mentioned here.)