You wouldn’t do surgery on yourself, so why would you try to manage your own investments? This statement might offend some people. Others would nod in agreement. Most financial advisors are in the nodding camp. Plenty of them bring up Dalbar’s data to convince clients that they can’t invest on their own.

Each year, Dalbar publishes its Quantitative Analysis of Investor Behavior. The study shows how the stock market performed over a period of time, compared to how investors performed in stock market funds. For example, the S&P 500 dropped 4.38 percent in 2018. But according to Dalbar’s research, the average investor in U.S. stock market funds lost 9.42 percent.

Here’s how this can happen. When markets rise, investors are often confident. They might increase the amount they’re investing every month. But when markets drop, many people get the jitters. They often sell when they shouldn’t, instead of riding out the storm. As a result, many investors buy high and sell low.

Nobody denies that investors do this. And Dalbar says it costs them plenty. Consider the 10-year period ending December 31, 2015. The S&P 500 averaged a compound annual return of 7.31 percent. But Dalbar says poor market timing led the typical investor to earn an average annual return of just 4.23 percent. That’s a whopping difference of 3.08 percent per year.

Financial advisors love this stuff. They might say, “We charge just 1 percent per year to keep you on track.” If investors really underperform by 3 percent per year, paying an extra 1 percent to an advisor might be a bargain…if the advisor can prevent them from speculating. But what if Dalbar is wrong?

Since 2014, Morningstar has published its yearly Mind the Gap reports. Like Dalbar, they measure stock market returns. But unlike Dalbar, Morningstar’s data says investors aren’t so dumb.

Over the ten years ending December 31, 2015, Morningstar says the average investor underperformed the funds they owned by 0.51 percent per year. Suddenly, an advisor who charges 1 percent per year doesn’t look like such a bargain.

You might wonder why Dalbar’s and Morningstar’s numbers look so different. In 2014, economist Michael Edesess, Kwok L. Tsui, Carol Fabbri and George Peacock wrote The 3 Simple Rules of Investing. They say Dalbar’s formula exaggerates how poorly investors perform. Several experts agree. They include Wade D. Pfau, who says Dalbar’s math is wrong. He’s joined by Ilia Dichev, an economics professor at Emory University; Travis Sapp, a finance professor at Iowa State University; and David Spaulding, the founder and publisher of the Journal of Performance Measurement.

Jason Zweig referenced them in his 2014 Wall Street Journal story, Just How Dumb Are Investors? Zweig says, "Dalbar's formula… has the effect of taking returns over the full period and dividing them by the total assets at the end — including money that wasn't in the funds from start to finish."

Here’s an example using the 10-year period ending December 31, 2015. U.S. stocks averaged a compound annual return of 7.31 percent. But Dalbar says the average investor in U.S. stock market funds averaged a compound annual return of just 4.23 percent.

Dalbar measures time-weighted returns instead of money-weighted returns. In other words, Dalbar ignores dollar-cost averaging. Most investors don’t invest lump sums in the market. Instead, they add monthly sums. For example, U.S. stocks averaged a compound annual return of 7.31 percent over the ten year period ending 2015. In that case, a lump sum investment in a low-cost index fund would have turned $10,000 into about $20,248. That’s a compound annual return of 7.31 percent. But if an investor added money every month (totalling $10,000 over 120 months) they would have had a lot less than $20,248 at the end of ten years. That’s because none of that money (perhaps with the exception of the first monthly deposit) would have had ten years to grow.

According to Dalbar’s critics, the firm is practically saying, “If you didn’t turn $10,000 into $20,248 over this 10-year period, that’s simply a result of your bad behavior.” Morningstar, however, uses money-weighted returns when they calculate investors’ performance. That’s why Morningstar says investors underperformed their stock market funds by just 0.53 percent per year between 2006 and 2015. That’s a paltry gap, compared to Dalbar’s claim that investors underperformed the market by 3.08 percent per year over the same time period.

Morningstar’s annual investor-return reports vary, year to year. Sometimes, they’re higher than what Dalbar claims. For example, over the ten years ending 2013, Morningstar says investors underperformed the funds they owned by 2.49 percent per year. In contrast, Dalbar says the average equity investor underperformed the market by just 1.52 percent over the same time period. To be clear, they’re also measuring two different things: Dalbar uses a time-weighted formula to compare investors’ performance to the S&P 500. Morningstar, on the other hand, uses money-weighted returns to compare investors’ returns with the returns of the funds they own (and not a market index).

Now let’s examine how this might affect you. If a financial advisor says, “You can’t invest on your own because Dalbar or Morningstar says you can’t,” it might be time to pause. After all, there are ways to control your investment behavior. Target Date funds appear to help. When Morningstar measured investors’ performance in Target Date funds from 1994-2018, the firm found that investors underperformed their funds by just 0.38 percent per year. As Morningstar’s Jeffry Ptak writes, “We found investors have succeeded in using target-date funds—the annual behavior gap was a modest negative 0.38 percent, which is smaller than the gaps we’ve observed in other asset classes in the past.”

Such funds put investors on auto-pilot. Investors often set up automatic, monthly deposits. Target Date funds gets rebalanced once a year. In other words, investors in such funds don’t have to do a thing. Perhaps that reflects the really smart investors.

For Further Related Reading About Investment Behavior

Andrew Hallam is a Digital Nomad. He’s the author of the bestseller, Millionaire Teacherand Millionaire Expat: How To Build Wealth Living Overseas