A recent article gave me deja vu that reaches back about a decade ago. I remember many high-flying mutual funds that put up impressive performance numbers during the tech bubble. I also remember the statistics which showed that while some of these funds had double-digit annual returns over multiple-year periods, the average mutual fund investor actually LOST money. How is that possible? Well, if the boom years happen when the fund is relatively small, and the bad years happen when the fund is large, this can easily be the case. It happens because once people have seen positive PAST performance they invest, then liquidate after times turn rocky. This psychology of investing is precisely why the typical retail mutual fund investor does so poorly vs. the “market” (See DALBAR Quantitative Analysis of Investor Behavior, March, 2011).
So, when I read the Bloomberg article yesterday about the current performance of Morningstar’s 2010 “Domestic Stock Market Manager of the Decade,” I couldn’t help but think of the DALBAR study. This manager’s fund is down about 30% year-to-date. It has also seen more than $7 Billion in net redemptions over the past 9 months ending in November. Knowing that Morningstar now publishes “Investor Performance” as well as the “Total Fund Performance,” curiosity got the best of me and yes, we found that the 3-year investor performance is only 69% of the actual fund performance. DALBAR’s longer-term study (twenty years ending 12/31/10) showed the average equity fund investor returned less than half of what the S&P 500 Index returned. Once again, this shows that inflows and outflows (investor decisions) were not well timed.
The moral of the story is that we believe it is best to devise a comprehensive asset allocation plan based on needs and tolerance for risk. Making tactical moves by shifting weightings is prudent, but jumping wholesale between hot investments and asset classes simply adds more volatility and also borders on gambling. This is not to say that broad changes are never needed, but they should only occur based on certain life changes such as loss of employment, cash flow needs, pending retirement, etc. As the famed economist Gene Fama Jr. once said, “Your money is like soap, the more you handle it the less you have.”