In a recent Morningstar study some truly shocking results were found.
Across US mutual and Exchange Traded Funds (ETFs) over the last 10 years, the average annual fund return was 7.71%. However, the average annual investor dollar return was 6.04%. A gap of 1.67% per year.
What this means is that the actual people investing in these funds are getting a worse return than the fund actually delivers.
This has nothing to do with fees as both figures are net of fees.
To put this into perspective, if you invest £100,000 for 30 years and achieve the fund return you would end up with £928,284.
However, if you achieved the average investor dollar return you would only end up with £580,887. Nearly 40% worse off.
These figures are based on funds across all different asset types. What’s even more terrible is that the gap is even worse when looking at specific equity funds.
Here the average annual fund return was 10.80% however the average investor return was just 6.42%. A huge gap of 4.38%.
Applying this to our £100,000 invested over 30 years example earlier, the difference is £2,168,667 vs £646,692. Staggering.
So, what’s going on here?
Well, throughout life we are taught that more effort, more work, more activity equals better results.
So naturally you would think that by researching more, picking more funds, buying and selling those funds at different times would help you achieve better investment returns.
Unfortunately, when it comes to investing this is not the case.
In the Morningstar study they site an example of a classic investor mistake.
The JP Morgan Pacific Technology fund fell just under 22% between 1st June 2018 and 1st June 2019. During this time there were millions of outflows from the fund, meaning investors didn’t like the return and decided to ditch the fund.
During the period 1st June 2020 to 1st June 2021 the same fund was up over 80%. But it wasn’t until the end of this period investors piled hundreds of millions of dollars into the fund. What happened next? You guessed it. The fund then fell 43% up to the 1st June 2023. Investors who got in at the top must have been sickened.
Of course, the same problem then happened all over again with large outflows from the fund.
You see when it comes to investments, less is actually more.
You don’t need to do lots of research and be constantly buying and selling funds. You can’t time the markets.
Less effort will most likely lead to better investment results.
Unfortunately, the financial media is against you. They want you to believe that investing is complicated. They need you to be constantly thinking about your portfolio and buying the next bright shiny fund. It helps them sell their papers.
When it comes to your own portfolio, think of it like a bar of soap. The more you touch it the more it disappears.
For most investors, all you need to do is find a fund or portfolio that you believe in, set up a direct debit to invest into it on a monthly basis and then let the magic of pound cost averaging and time do the job for you.
Carl Roberts, Director
If you want to learn more about this topic, please find the link.
More information about our fund the YFS Intelligent Wealth Fund can be found here: Hargreaves Lansdown or AJ Bell
Risk warnings
The value of investments and the income derived from them may fall as well as rise. You may not get back what you invest. This communication is for general information only and is not intended to be individual advice. You are recommended to seek competent professional advice before taking any action. All statements concerning the tax treatment of products and their benefits are based on our understanding of current tax law and HM Revenue and Customs practice. Levels and bases of tax relief are subject to change. This blog is based on my own observations and opinions.
