Are Investors Doing The Right Things?

img9Believe it or not, among the people who invest, mutual fund buyers are the ones who mostly do the opposite of what they should do, buy low and sell high.

By studying cash flows (tracking the movement of money into and out of mutual funds), 2 financial research institutions, Dalbar and Morningstar, found that the vast majority of people buy investments when prices are high, and they sell when prices are low.

For example, consider the returns of a fund that (according to Morningstar) averaged 15% per year for the ten years ending December 31, 2006. Morningstar says the average investor of that fund earned only 2.6% per year. In another fund that posted an 8% annual return, investors earned only 0.6%. A third, which posted a 7% average return, has an average investor return of -15%.

There’s such a large discrepancy between investment returns and investor returns because investors tend to buy funds only after they’ve risen in value. Funds attract media attention only after they do well, and fund companies place ads in magazines and newspapers only after the funds produce a great record they can tout. Investors agree that the results are terrific, and they assume that a fund that made lots of money in the past will continue to do well; so they buy. When those profits fail to materialize, they sell. Then they scratch their heads and ask, “How come I’m not making money with my investments?”

The solution: Buy and hold for years and years.

[via Ric Edelman]

  1. #1 by kkchow23 on July 11, 2007 - 3:37 pm

    Very interesting article, Irwan hope you don’t mind me using this article at my blog too.. I think everyone should know bout that.

    Actually in the long-term, even if we’ve buy a unit trust/mutual fund at a high price, just as long as we hold on to it, we should be still profiting instead of losing. It’s just the matter of time, or if we want that to realise faster, the best option is to invest regularly(dollar cost averaging) even though the market price may fluctuate.

    We must always remember that unit trust is not share market. Best we leave the job for the fund managers to determine the performance of the fund. The decision for us to make is actually to choose the right company/fund. And sorry but if you might think this is an advertisement, but to me Public Mutual is the right choice. Others are performing too, just need to determine the right fund.

    If you don’t agree or have other opinion, probably you can email me :

  2. #2 by Irwan on July 11, 2007 - 7:17 pm

  3. #3 by Chia Josephson on November 9, 2010 - 4:02 am

    I’d have to bury the hatchet with you here. Which is not something I typically do! I enjoy reading a post that will make people think. Also, thanks for allowing me to speak my mind!

Comments are closed.