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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. Phone: 617-723-6400

Federal Reserve Plaza 600 Atlantic Avenue

Boston, MA 02210 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.

Š 2008 DALBAR, Inc.

Past performance is no guarantee of future results. 2

DALBAR, Inc. Phone: 617-723-6400

Federal Reserve Plaza 600 Atlantic Avenue

Boston, MA 02210 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

Š 2008 DALBAR, Inc.

Past performance is no guarantee of future results. 3

DALBAR, Inc. Phone: 617-723-6400

Federal Reserve Plaza 600 Atlantic Avenue

Boston, MA 02210 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%

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%

S&P 500

Data sources: Investment Company Institute, Morningstar Associates and Lehman Brothers

Š 2008 DALBAR, Inc.

Past performance is no guarantee of future results. 4

DALBAR, Inc. Phone: 617-723-6400

Federal Reserve Plaza 600 Atlantic Avenue

Boston, MA 02210 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. 5

DALBAR, Inc. Phone: 617-723-6400

Federal Reserve Plaza 600 Atlantic Avenue

Boston, MA 02210 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.

Š 2008 DALBAR, Inc.

Past performance is no guarantee of future results. 6

DALBAR, Inc. Phone: 617-723-6400

Federal Reserve Plaza 600 Atlantic Avenue

Boston, MA 02210 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

Š 2008 DALBAR, Inc.

Past performance is no guarantee of future results. 7

DALBAR, Inc. Phone: 617-723-6400

Federal Reserve Plaza 600 Atlantic Avenue

Boston, MA 02210 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. 8

DALBAR, Inc. Phone: 617-723-6400

Federal Reserve Plaza 600 Atlantic Avenue

Boston, MA 02210 www.dalbar.com


Compliments of Russ Thornton QAIB 2008

Š 2008 DALBAR, Inc.

Past performance is no guarantee of future results. 9

DALBAR, Inc. Phone: 617-723-6400

Federal Reserve Plaza 600 Atlantic Avenue

Boston, MA 02210 www.dalbar.com


Compliments of Russ Thornton QAIB 2008

Š 2008 DALBAR, Inc.

Past performance is no guarantee of future results. 10

DALBAR, Inc. Phone: 617-723-6400

Federal Reserve Plaza 600 Atlantic Avenue

Boston, MA 02210 www.dalbar.com


Compliments of Russ Thornton QAIB 2008

Š 2008 DALBAR, Inc.

Past performance is no guarantee of future results. 11

DALBAR, Inc. Phone: 617-723-6400

Federal Reserve Plaza 600 Atlantic Avenue

Boston, MA 02210 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.

Š 2008 DALBAR, Inc.

Past performance is no guarantee of future results. 12

DALBAR, Inc. Phone: 617-723-6400

Federal Reserve Plaza 600 Atlantic Avenue

Boston, MA 02210 www.dalbar.com


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