Kirk, I believe this is the article you wanted.
-----------------------------------------------
The Wall Street Journal Interactive Edition
-- October 27, 1997
Was Investor Survey A Rush to Judgment?
By ROBERT MCGOUGH
Staff Reporter of THE WALL STREET JOURNAL
Are mutual-fund investors really so naive that they
believe they're going to earn 34% a year for the next 10
years?
That's the conclusion of a widely trumpeted survey
sponsored by Montgomery Asset Management, a San Francisco
mutual-fund firm. (The survey was conducted in August and
September, before last week's market slide). If true, it
would mean that investor expectations are shockingly,
astronomically high. And that's how it's been played by
Montgomery and news reports.
After all, the long-term return in the stock market since
1926 has averaged less than 11% a year, according to
Ibbotson Associates. Even in the spectacular five years
through Sept. 30, the Standard & Poor's 500-stock index
gained less than 21% a year. Fund investors are sorely
deceived if they expect 34% a year for the next decade.
Question of Ambiguity
But on closer examination, the survey's question about
10-year returns is ambiguous: Respondents could have
chosen two radically different ways to answer it. That
ambiguity -- and the statistical analysis Montgomery
applied -- may have skewed the results of the survey.
The issue of whether survey respondents clearly
understood the question was raised to Montgomery, and the
firm now says it is considering changing the wording next
time around.
Here's the issue: In a question about expectations for
future mutual-fund returns, the survey asks, "What do you
expect it [mutual-fund returns] to average over the next
10 years?"
The question doesn't specify that it's looking for an
annual return, though that's how Montgomery interpreted
the responses. So some investors may have thought
Montgomery was asking about their expected cumulative
return over 10 years.
There's a world of difference between cumulative and
annual returns. For instance, one investor might expect a
gain of 10% a year over the next decade. Another might
expect a gain of 159% in total over the course of the
decade. Both of them, in fact, are expecting the same
rate of return: 10% a year, compounded for 10 years,
equals a return of about 159%.
However, the average of 10% and 159% is 84.5% -- a
useless number for understanding what either investor
expects.
'Wide Distribution' of Answers
Montgomery argues that the context of the question is
clearly annual returns. The question immediately prior to
the 10-year query is: "On a percentage basis, what do you
expect the return on your mutual fund investments will
average during 1997?"
Jeff Schwartz, a senior consultant at Ibbotson, says you
can't assume respondents know annual return is intended.
"That must be explicitly stated," he says.
Montgomery says it is considering inserting the word
"annual" in the 10-year question for its next installment
of the survey. "If we added annual, would that make it
clearer?" asks Jane Ginsburg, a spokeswoman for
Montgomery. "It might," she adds.
Does Ms. Ginsburg really think that the average investor
expects 34% a year from fund investments for the next 10
years? "I don't know," she says.
Montgomery won't release the distribution of responses
about 10-year returns. Nor will it say whether any single
individual in the survey expected a return of 34%-annual
or otherwise.
But Ms. Ginsburg does say that the median response --
that is, the one right in the middle of the 750
responses, with half of the responses lower and half
higher -- was a 15% return. "Obviously, we've got an
incredibly wide distribution" of responses, she says.
Median vs. Average
If so, Montgomery might have been on more solid ground if
it had cited that median estimate of 15% a year, instead
of the 34% average. Statisticians say the median is a
more representative statistic than the average "if the
response distribution is really skewed," says Peter
Miller, a professor at Northwestern University, Evanston,
Ill. "The average is sensitive to extreme values. That's
why you often see reports of median income instead of
average income."
Certainly, expectations of 15% returns annually might end
up being optimistic for the next decade. But they are
much closer to the historical returns for stocks, and far
more plausible, than 34% a year.
At The Wall Street Journal's request, Sage Online, a firm
running an investment forum on America Online, recently
surveyed 323 investors about their expected 10-year
annual returns. Sage found that the median response --
and also the response most frequently given -- was 12% a
year over 10 years from fund investments.
"I've never met a person who expected to get an average
annual return of over 30% in the market," said Stephen
Cohn, a senior partner at Sage.
Why would Montgomery and a number of news organizations
believe that investors, implausibly, expect 34% a year
returns? One explanation is that a cherished myth on Wall
Street is that the average investor is dumb. In fact,
professional investors can be just as prone to greed and
panic as the little investor. Consider: Some individual
fund investors are pulling money out of Asian
emerging-markets mutual funds, but they weren't nearly as
big a factor in trashing of those markets last week as
panicked "professionals." |
