Average mutual fund buyer is his own worst enemy
BOSTON, Dec 17 (Reuters) - As investment strategies go, professionals say, buy and hold
is pretty hard to beat. It's right up there with buy low, sell high.
Despite the flood of information aimed at educating mutual fund buyers, there is persistent
evidence that these, along with other long-held, rudimentary investment rules, are routinely
ignored by many individual investors.
And when individuals overlook fundamentals, it can be costly for them, experts say.
In a recently released update to a long-running study of investor behavior, Boston-based financial research firm Dalbar found
that while the widely followed S&P 500 stock index returned an average of 17.9 percent annually over the last 15 years, the
typical investor earned only 7.25 percent per year over the same period.
The main reason for the lagging returns: nonprofessionalinvestors are making bad decisions.
``The cause of this discrepancy between theoretical and real returns is investors' attempts to time the market, rather than
remaining invested for the entire period,' Dalbar said.
Cumulatively, the S&P 500 returned 1,083 percent over the 15 years of the study, while the actual return for a typical investor
is only about 186 percent, Dalbar found.
Louis Harvey, president of Dalbar, said research showed a distressing lack of sophistication by investors.
``We plotted month to month, and we could see that whenever the market took a dip people got out and whenever it rose
people would pile in,' he said, adding that while there had been some improvement, much remained to be done.
``Investors usually respond intuitively, and that intuition is almost invariably wrong,' Harvey said.
The study showed that the typical equity mutual fund investor held a fund for three years, a slight increase from the 2.8 year
average over the life of the study. Between 1984 and the end of 1998, average retention has risen 5.2 percent, or 19 days, per
year.
It also found that redemption rates have been relatively constant since 1992, indicating that investors are making fewer
panicked moves. There is evidence that a small but growing number of investors see downturns in the market as buying
opportunities, Dalbar found.
Mutual fund companies generally recommend a buy-and-hold strategy but investors, assaulted by a seemingly unending stream
of ideas from magazines, newspapers and Web sites, often ignore professional advice.
``Money has a habit of chasing performance,' says John Wilson, manager of State Street Research and Management Co.'s $3
billion Investment Trust.
``Typically it chases the most extreme performance because it's really easy for a broker to call up customers and say, 'Hey
how would you like to be in this fund that is up 100 percent' or whatever,' he said.
Professionals mostly welcome the mushrooming of advice and stop short of blaming the media for mutual fund turnover, but
still warn that hype can spawn unrealistic attitudes.
``I think most people see the double-edged sword' in the proliferation of information, said Sarah Libbey, a senior vice
president at Fidelity Investments.
She said turnover for turnover's sake was not a serious problem at Fidelity and added that the company makes serious efforts
to educate investors about the fundamentals.
The Vanguard Group, known for its low costs, takes a particularly harsh view of market timers and says this attitude is
reflected in a retention rate twice the industry average. Spokesman Brian Mattes says investor advice publications are only
partly to blame.
``It may be unfair to lay the blame entirely on the magazines. It should be laid on the market and on unrealistic investor
expectations,' Mattes said.
In the end, professionals said, the ultimate responsibility for poor real return lies with the investor.
``It's really caveat emptor,' said Dalbar's Harvey. |
