Saving Investors from Themselves…

We truly believe the value we bring to clients is “Saving Investors from Themselves.” While over the years, investors have become smarter, but knowledge is a dangerous thing.  Too many shareholders buy and sell at the wrong times, according to a Morningstar study – Many people are buying good funds, but they are using them badly,” they said (link to Article)

Despite investors’ increasing sophistication, millions of investors persist in buying the latest hot funds…not the best way to manage your finances. As example, in the late 1990s, shareholders dumped bond funds and put too much in stocks funds (all eggs in one basket). That proved an ill-timed choice, said Morningstar. During the decade that began in 2000, bond funds returned 7 percent annually, while stock funds stayed about flat. Many stock investors suffered poor results because they bought at the top of the market. After suffering through a downturn, they sold near a low.

Here We Go Again…During the past year, investors have been dumping stock funds and overweighting bond funds. As a result, some shareholders missed the rally that began in March 2009. Will this be a poster child for the mistake that investors continue to make?

To estimate the impact of poor timing, Morningstar calculates a figure that it calls “investor returns.” This represents how much the average dollar in a fund actually returns. If investors buy at the peak and sell at the trough, the investor return will be low. In contrast, total returns indicate how much you would have gotten if you invested at the beginning of a period and stayed put.

To appreciate the importance of investor returns, consider that CGM Mutual returned 4.1% annually during the decade ending in May. But individual shareholders did not fare so well. Because they bought at peaks and sold at lows, the investor return for the fund was only 2.6%.

Morningstar estimates that the average fund’s investor return is several percentage points lower than the total returns. Investors are losing more money because of poor timing than we are from expense ratios, making an advisor a good investment – there’s value in helping investors avoid these types of mistakes.

The industry is set up to promote bad investor behavior – by launching numerous funds in hot sectors, according to Morningstar. This induces investors to buy near peaks.

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