Market Timing Skills of the Average Investor

Market Timing Skills of the Average Investor

May 03, 2022

Are you skilled at guessing where the market will go on a monthly/yearly basis?  Have you had the “gut feeling” - lured by the siren song of the financial media – that this time is different and it is time to get out?  Well – you’re not alone.  And believe it or not – the average investor has been correct in their guesses at least half the time in 12 of the last 20 years.  However, 28 years of analysis from DALBAR, Inc. reveals the average investor still ends up on the losing end.

The first question you may have is – who is DALBAR?   They are the financial community’s leading independent expert for evaluating, auditing and rating business practices, customer performance, product quality and service since 1976.  And the next question to be answered is (or should be), how do they define the “Average Investor?”  The average investor refers to the world of all mutual fund investors whose actions and financial results are restated to represent a single investor. This allows the entire universe of mutual fund investors to be used as the statistical sample, ensuring ultimate reliability.

Now that we have this out of the way – we can see from the chart below (provided by DALBAR) the actual Guess Right Ratio from 2001 – 2021.  What you are witness to in the chart is DALBAR’s analysis of investors’ market timing skills by measuring net purchases and sales each calendar year.  Meaning the percentage of time they guessed right each month of that calendar year on the direction of the market.  Therefore, in 2001 investors guessed correctly under 50% of the time (less than 6 of 12 months) as compared to 2019 which was around 25% of the time.

DALBAR determined the percentage by fund inflows and outflows (money) of how investors correctly anticipate the direction of the market the following month.  For example, investors guess right when a net inflow is followed by a market gain or a net outflow is followed by a decline.  Surprisingly, as mentioned earlier, investors have guessed right at least half the time in 12 out of the last 20 years (but guessed correctly only 4 of the 12 months in 2021).

Based on those facts, one would believe that the average investor should have compiled some impressive returns over the last twenty years, yes? Not so fast.  Unfortunately for the average investor, whether they guess right or wrong, it seldom produces superior gains either way because, according to DALBAR, “the dollar volume of bad guesses exceeds the dollar volume of right guesses. Even one month of wrong guesses can wipe out several months of right ones.”  And this is exactly what has continued to happen. 

What is my point to this entire data-driven article?  Behavior.  More to the point, Investor Behavior.  As quoted from Author Nick Murray, “The dominant determinant of long-term real life investment returns – that real people get – are driven by the behavior of the investor themselves.”  Unfortunately, most investors do not think this way.  They falsely believe -provoked by the waterfall of financial media sewage - that timing and selection (when to be in and out of the market and what to own) are the primary determinants.  And now we can see (from above chart) that even when the average investor has timed the market correctly…their behavior has continued to plague their returns. 

As the self-proclaimed voice of reality – when the urge engulfs you to just do something – we can find a calming truth from a hidden treasure of our childhood past: “Doing nothing often leads to the very best of doing something.” – Winnie the Pooh.

The information is illustrative only and provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.

The views expressed in this commentary are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed forward‚Äźlooking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.

Past performance shown is not indicative of future results, which could differ substantially.

All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.

DALBAR, Inc. is the financial community’s leading independent expert for evaluating, auditing and rating business practices, customer performance, product quality and service. Launched in 1976, DALBAR has earned the recognition for consistent and unbiased evaluations of investment companies, registered investment advisers, insurance companies, broker/dealers, retirement plan providers and financial professionals. Report source- Quantitative Analysis of Investor Behavior. 2021

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