By Scott Ronalds
Timing the market is a mug’s game. You might get it right once or twice, but over the long term, switching in and out of funds based on recent returns and ‘expert’ forecasts will likely do your portfolio more harm than good. The proof? Look no further than Morningstar’s latest study on investor returns.
In a report titled Mind the Gap, Morningstar measures the actual returns that U.S. mutual fund investors experienced against the returns of the funds they invested in over the 10-year period ended December 31, 2013. They do this by taking a fund’s reported return and then adjusting it for inflows and outflows so they have a measure of how the typical investor fared.
The results show that the average investor gained 4.8% (per year) over the last decade, while the average fund gained 7.3%. This difference, or performance gap, is substantial. Moreover, the gap was evident in all asset classes measured. It was the largest in international and sector funds, where the average investor enjoyed a return of 5.8%, but the average fund returned 8.8%. Brutal.
Morningstar’s director of fund research, Russel Kinnel, concludes: “The data tell a tale of poor timing, and it seems to be getting worse. I suspect the 24-hour news cycle inundates us with news and opinions leading to investing based on anxiety rather than logic.” His advice is to stick to your plan and tune out the noise. That’s mindful counsel.