Your mutual funds did great last year. Were you along for the ride?
- April 9, 2010
- 6 comments
- Posted in Investing, Latest Posts
Odds are, you sold stock-owning mutual funds last year, or at least cut back on putting new money in. As a result, your fund did a whole lot better than you did yourself.
That’s typical of all mutual funds. Their average investors don’t get full value from the funds they own. The reason is simple. You usually buy, or add to, successful funds after they’ve started zooming in value, not before. You sell during down or mediocre years, before the fund picks up again. On a buy-and-hold basis, the fund’s past performance could be fine. But because of the way you timed your investments, you might even show a loss.
How far behind do individuals fall? You can find out at Morningstar.com, which keeps track of average investor returns in every fund it covers. Go to Morningstar’s home page and enter the name of a fund in the “Quotes” box. When the fund page comes up, click on “Performance.” You’ll get the record of its 10-year (or longer), official “Total Returns,” not counting expenses. Then click on “Investor Returns,” to find out how well (or poorly) a typical investor did.
The results aren’t pretty. Stocks have been deeply unkind to investors over the past decade, and investors’ market-timing choices, even worse. The average equity fund earned 2 percent a year for the 10 years starting in January, 2000. Their investors earned a shade under 0.5 percent. That’s not just 1.5 percentage points less, it’s 75 percent less! The gap was larger for specialized funds, such as natural resource and technology funds, and smaller for diversified funds, but the sad story was the same.
Investors chase performance in bond funds, too. Bonds were the big investment story of the past decade, returning 5.5 percent a year. But bond fund investors took home an average of only 3.7 percent. Investors in balanced funds, which own both stocks and bonds, seem the least susceptible to flight or flight. Even so, their funds returned 2.9 percent while they earned a shade over 2 percent. That’s 30 percent less.
“Tragic,” is the word used by Morningstar’s research director John Rekenthaler for these results. The losses in your investment accounts are partly due to the national financial catastrophe, but also a result of your own market-timing decisions.
Some funds do you the favor of reporting your individual investment results alongside the fund’s returns, so you can see how well your own account has done. But the majority of funds don’t.
The investors most likely to match their funds’ returns are those in 401(k)plans. The Vanguard Group reports that only 13 percent of the partipants in the 401(k)s they run traded their accounts last year. That’s the glory of inertia. When investing is automatic you tend to keep your sticky fingers off.
What’s the lesson for people managing their own money? If you seek the thrill of aggressive funds, you should be prepared to stick with them during their poor years, too. Otherwise, you’ll probably earn only a small fraction of what those funds deliver. Anyone who panics and sells when stocks decline too far should stick with conservative funds. Over the long term, they’ll do better for you than a high-performance fund that you’re too afraid to keep.
Buy-and-hold has a bad reputation today because of the 10-year stock market slump. But what’s the alternative? CDs at interest rates of 0.5 percent? Futile efforts at market timing? Falling for high-cost high-risk strategies pitched at investment seminars? Your only sensible choice is the old-fahionedone: Split your money prudently between low-cost stock funds and bond funds and hang on.
Tags: market timing, Morningstar, mutual funds
I just received an inheritance and my brokerage (where I have a small money market & Roth) wants to put a large amount into a variable annunity (not a fixed annunity that’s like a CD). My parents had a fixed annunity which did well in the early 90’s. I’m scared of all the stipulations on this variable annunity. I’m 55 years old.
What’s your input?
You’re right to be scared about that variable annuity. It has huge fees which can’t help but make it a poor performer. There are penalties for early withdrawals. If you’re lucky enough to earn any capital gains (after expenses), they’ll be taxed at ordinary income rates when you make withdrawals, not at the lower capital gains rate. Variable annuities pay higher commissions than anything else in a financial salesperson’s kit, which helps explain why they’re promoted so heavily. VAs are complicated, so I can’t go into all the details here. But I have a section on them in my new book.
I have a managed account with Fidelity. They have me in about thirty funds and increasingly they are Fidelity funds. After Fidelity closed at 5:01 on April 15, my accountant made an appointment for me with someone who was still in the office. He is a certified financial planner. He researched the Fidelity funds I have and found a lot of duplication. Financially challenged as I am, this number of funds and the number of Fidelity funds have given me some concern.
I am very tempted to invest with him because I think he has a sound investment strategy and is someone I can call when I need to.
Do you have an advice on whether I am right to be concerned and maybe some guidelines on picking a financial planner? He charges about the same as Fidelity: 1.3%?
Thirty funds is shocking. Awful. 1.3% is a bit stiff–I’d rather see 1%. But Fidelity is certainly running up your expenses all by itself. A good planner makes sense. But please get a planner who charges only fees, including percentage fees for managing money, and doesn’t also sell products on commission.
Ms. Quinn:
I have a math question. Mutual funds indicate how they have performed for i year, 3 years, 5 years typically. How does one measure how they have done since day one with contributions every two weeks of various amounts? How does one determine the percentage they have made over 10 or more years? Is there such a meaningful concept? Do I use weighted averaging? My interest is just to masure my performance. Thank you.
Your own performance is key, not the mutual fund’s performance. I looked for programs that would do that when I did my last book but didn’t find any for general use. Financial planners have programs that show you personal performance, but those are expensive and for the trade.