Asset Management
Emotional investing doesn’t do you any favours
Fund returns vs. Investor returns
Source: Morningstar Research Inc.
*Investor returns are calculated by adjusting a fund’s official returns using monthly cash flows in and out of the fund. Thus, Morningstar calculates a rate of return generated by a fund’s investors. As with an internal rate of return calculation, investor return is the constant monthly rate of return that makes the beginning assets equal to the ending assets, with all monthly cash flows accounted for. The investor return is essentially the aggregate investors’ bottom line. As of August 31, 2018, the 15-year annual Fund return for Invest International Companies Fund was 7.44%; the Investor return over the same period was 2.44%. Values above assume semi-annual compounding over a 15 year period.
“When markets lurch up and down, investors tend to do worse than the markets and mutual funds because they are timing mistakes. Investors large and small tend to sell after downturns only to buy back in after a rally.”
– Morningstar
(Mind the Gap 2018 study)
Why do investors underperform?
Fund returns vs. Investor returns
As of August 31, 2018.
Source: Morningstar Research Inc.
*Investor returns are calculated by adjusting a fund’s official returns using monthly cash flows in and out of the fund. Thus, Morningstar calculates a rate of return generated by a fund’s investors. As with an internal rate of return calculation, investor return is the constant monthly rate of return that makes the beginning assets equal to the ending assets, with all monthly cash flows accounted for. The investor return is essentially the aggregate investors’ bottom line.
Many investors have a recency bias and focus on short-term fund performance; investing emotionally, buying at the top and selling at the bottom, compromising their ability to realize the same returns as the Fund.
Jeff Feng and Matt Peden do the opposite, they put aside emotion and focus on company fundamentals, taking advantage when stock market declines occur.