We have commented a number of times about the issue of investor psychology and its impact on their actual portfolio returns. On May 24th we wrote: How our emotions hurt our investment decisions. We found another example today.
Investors can lose money even when they are invested in the best-performing mutual funds, says the Motley Fool.
Their big error? Jumping in and out of a fund in order to attempt to time the market, instead of staying in it for the long haul. It’s a mistake advisors can point to when trying to persuade investors to stay the course.
The Motley Fool cites the eye-popping example of the CGM Focus Fund (CGMFX), which was the best-performing mutual fund from 2000 to 2010. Even as the S&P 500 was flat during that period, the fund saw a better than 18% annualized return. But according to Morningstar research, the fund’s average investor lost 11% annually during the period. Many investors jumped in after the fund’s banner 2007 and were burned when it dropped precipitously in 2008. So they left in 2009 and missed another rise.The problem is widespread. Citing a study from Davis Advisors, the Motley Fool says the average stock mutual fund had a 9.9% annualized return from 1991 to 2010, while fund investors saw only 3.8% average returns in the same period. In dollar terms, the average fund investor reaped $21,200 on a $10,000 investment in those years, instead of the $66,300 he could have garnered if he had just stayed the course.