Separating Good Behavior from Bad Behavior
Emotion may be the biggest obstacle to investment success. In fact, removing emotion from the investment process through systematic rebalancing and adhering to a scientifically engineered asset allocation strategy is the most valuable service we provide.
Indeed, a highly disciplined DFA-based investment approach may add more value than you think.
Morningstar, Inc. (an independent third party analytics firm), produced an interesting internal study some years ago that compared investors' actual investment returns over a 10-year period with the returns of the mutual funds they were invested in.
Not surprisingly investors in actively managed funds performed relatively poorly all the way around. But oddly, even (presumably) educated do-it-yourself index investors didn't do as well as they could have. In other words, they failed to capture 100% of the returns that their own funds had to offer.
The table below shows that index mutual funds produced an aggregate annualized return of 8.94%, yet the average return index investors actually realized in their own portfolios was only 7.06%. The question is why.
This sub-optimal performance was simply due to the poor timing of cash flows into and out of the funds, i.e. they engaged in "bad behavior." Specifically, they pulled money out as investments went down in value and invested more as prices rose - pretty much the exact opposite of what you want to do. Thus they needlessly missed out on what they could have (and should have) achieved.