Morningstar Advisor - April/May 2013 - (Page 60)
Gray Matters
Why Investors Lag the Returns
of Their Funds
By Russel Kinnel
Volatility proves challenging for many shareholders.
What happens when investors meet mutual
funds? Sometimes, it’s a great thing.
Investors find good funds and enjoy solid
returns for a long time. Other times, investors
have a poor experience, even in a fund
with great returns. People don’t get in until
after the fund has put up huge returns.
Then, as often happens with any asset that has
spiked in value, the fund falls flat, and
impatient investors flee.
60 Morningstar Advisor April/May 2013
Big surges and then big declines spur
greed and envy, then fear and anger. The more
emotional investors get, the worse their
decisions will be. The past two bear
markets are perfect examples of these
behaviors. As stock markets soared, investors
bought stock funds heavily, only to see
their investments plunge in the ensuing bear
markets. Then, they bailed out of the
funds close to the bottom, only to miss the big
rebounds. Not everyone did that, of course;
many investors were patient. But flow
data tells us too many investors went in the
wrong direction.
Timing Is Off
The real-world returns investors experience
in the funds often don’t resemble the
funds’ published returns (which are based on
arbitrary time frames, such as calendar
years). The difference between the two returns
is often called the behavior gap, and fund
Table of Contents for the Digital Edition of Morningstar Advisor - April/May 2013
Morningstar Advisor - April/May 2013
Contents
Contributors
Letter From the Editor
The Pursuit of Happiness and Financial Advice
What Strategies Do You Use to Control Risk?
Driven to Succeed for Clients and Family
How to Assess a Portfolio’s Bond Risk
Luck, Skill, and Investing
Investments á la Carte
Investment Briefs
Investing’s No- Brainers Have Costs
A Defensive Ride
Risk On/On Risk
The Risk of Being Overconfident
Year of Living Dangerously
The Risk-Parity Approach
A Guide to Mutual Funds Running Risk-Parity Strategies
What Moats Tell Us About Risk
Risk’s Wake-Up Call
Seeing Is Believing
Why Investors Lag the Returns of Their Funds
Liquidity Signals
Pump Them Up
Golden Oldies Keep on Truckin’
Our Favorite Mutual Funds
50 Most-Popular Equity ETFs
Undervalued Stocks With Wide Moats
Our Social Blind Spot
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