In a recent Intelligent Investor column for The Wall Street Journal, Jason Zweig provides some interesting data on how investors — and their advisors — often underperform the funds in which they invest.
In the 12 months ending Sept. 30, Zweig says that investors in 47 funds with at least $1 billion in assets underperformed the funds by at least 3 percentage points, according to Morningstar. Over the past five years, the average gap between fund returns and the actual returns of investors in those funds has averaged 1.17%. Similar performance gaps have been found by researchers looking at stock fund and hedge fund investors, and even exchange-traded fund investors will lag their funds, Zweig says.
One big reason for these gaps is that investors chase hot funds and dump cold ones at the wrong times. What’s particularly interesting is that some research shows that professional advisers are guiltier of such behavior than individuals. One study found that from 1991-2004, investors underperformed their U.S. stock funds by an average of 1.6 percentage points. For load funds sold by brokers, the gap was 1.9%, Zweig says; for no-load funds bought directly by investors, it was 1.0%. That led one of the study’s authors, Geoff Friesen, to tell Zweig that instead of shooting themselves in the foot, many investors “are paying someone else to do it for them.”
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