Impatient Investors Lose Money in Top Funds

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.
Despite overwhelming evidence to the contrary, the popular press continues to tell people that hiring an investment advisor reduces their returns because of the fees an advisor charges.  Take a look at the “average investor” in the CGM Focus Fund.  If all an advisor had done was held that investor’s hand and told him to stay the course, charging him 1% for the hand-holding that investor would have been better off by 28% per year.
This is not an endorsement of this particular fund but simply an illustration that academic studies of theoretical returns based on models have very little to do with the actual results that people have when they invest on their own.  The value of professional portfolio construction and management is the implementation of strategies that are suitable for the individual investor in a one-on-one relationship with an investment advisor with the result that much of the emotion is removed from the investment process leading to the greater potential for success.
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