4. Identify Goals

Investors Good At Hurting Themselves: Investor Returns vs Investment Returns

In 2009, Morningstar did a study comparing mutual fund returns vs investor returns. Here is what they got:

Fund Category Fund Return Investor Return Investor Lag
Large-Cap Blend -1.4% -5.7% -4.3%
Large-Cap Growth -1.7% -7.7% -6.0%
Large-Cap Value -1.8% -2.2% -0.4%
Mid-Cap Blend 0.4% -3.0% -3.4%
Small-Cap Blend -0.5% -6.9% -6.4%
Europe/Pacific 3.1% 0.5% -2.6%
Emerging Markets 15.6% 3.8% -11.8%
Financials -10.5% -28.6% -17.9%
Health Care -1.3% -3.1% -1.8%
Communications 1.9% -3.7% -5.7%
Energy 8.6% 4.0% -4.6%
REITs -2.5% -11.8% -9.3%
Technology -2.6% -8.3% -5.7%
Utilities 5.5% 2.1% -3.4%
Total and Simple Averages 1.0% -3.5% -4.5%

Source: Morningstar

We can make a few observations about these data:

1. In all fund categories, investor returns lag fund returns. Why so? because investors tend to get in and out of a fund at the wrong time. They tend to chase past winners that are about to turn into losers.

2. The average lag by investors is 4.5% a year. That’s huge! Based on this data, in a decade, investors would make 45% less than the market would give them. (This is in fact what I try to help my clients avoid. My job is not to beat the market, but to capture all that the market gives.)

3. Investors tend to have less lags among boring categories, but more lags among exciting categories. For instance, the lag among Large Cap Value is only 0.4%, but among emerging market funds is 11.8%. This shows the most dangerous enemy of our financial well being is in fact our own emotion.

So how can we do better than the average investors?

At risk of sounding self-serving, I’d like to suggest using a fiduciary (fee only) financial advisor. Because such an advisor can help you stay on top of your personal finance without engage emotionally with your money.

Michael Zhuang is founder and principal of MZ Capital, a fee-only registered investment advisor firm located in the Greater Washington D.C. metropolitan area.