March 20, 2012
Buy, Hold and Be Happy?
When an investor selects a mutual fund that’s hot, it usually backfires.
Morningstar Inc. generated the evidence for Squared Away: it essentially analyzed returns for two types of investors in the nation’s 25 largest fund companies – from PIMCO, Fidelity Investments and Vanguard Group on down. Using fund flow and performance data, it compared returns to a theoretical investor who stayed put for an entire decade to the returns that investors in funds actually experienced, given that they move into and out of funds.
Investors earned 3.8 percent per year, on average, over the decade ending Dec. 31, 2011, the Chicago fund tracker said. If they had stayed put, they would’ve earned 5.3 percent. The results were not equal, because some of us make brilliant moves but more of us make dumb moves, such as buying high and selling low.
The gap – 1.5 percentage points – “is bigger than [fund] expense ratios,” said Don Phillips, Morningstar president of fund research. Investors “really hurt themselves that much.”
To be fair to 401(k) investors, their inertia is great. Those who select funds from employer-run plans typically buy and hold. But more money – about $1 trillion more – sits in Individual Retirement Accounts, where investors are more likely to trade on their own or to have brokers or advisers recommending new funds, whether motivated by their own commissions or their clients’ goals.
To try to improve returns, Phillips listed three types of funds investors should avoid: …Learn More