This time of year is when Morningstar releases the annual review of managed funds performance and compares it to the market. However, in this month's feature article, we take a slightly different look at these numbers and compare the returns that were reported by the funds with those that the investor actually receives. Whilst that sentence may sound strange with hidden fees or the like inferred, the answer is actually quite simple - the problem is the investor!
In his article titled "Investors' miscues sap returns – again", John Waggoner notes that "the average investor's return has lagged the average fund's return by 2.49 percentage points a year with the typical investor gaining 4.8% a year for the 10 years ended December 2013, vs. 7.3% for the typical fund". The reason for this is that investors try to time the market rather than focusing on the long term time IN the market.
This is what is often referred to as "the behaviour gap" and as Carl Richards writes in the New York Times, we are still making the same old mistakes. He notes that "Most people buy and sell. We hunt for the next rock star mutual fund manager and follow our brother-in-law's tips at the family barbecue. In fact, as Nate Silver points out in his book "The Signal and the Noise", the hold times for stocks have declined every decade until the 2000s. Today, we hold our stock investments for about six months. We're clearly not what anyone would think of as long term investors.
Our Director of Wealth Management, Daniel Minihan, recently wrote a piece on Long Term Investing (drawing some parallels with Hulk Hogan of all people!) which included some analysis on the long term returns of Australian and International shares over a 30 year period. This analysis is predicated on an investor staying true to the course, despite all the ups and downs, which from the recent data and the articles above is not assured.
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