Morningstar Advisor - August/September 2012 - (Page 68)

Gray Matters The Myth of the Dumb Investor By John Rekenthaler Fund investors consistently find good offerings, but they are poor market-timers. The myth about mutual fund investors goes like this: Mutual fund investors are bad at selecting funds. If investors were to hold index-only funds instead of the rotten funds that they choose, they would be far better off. Thus, mutual fund investors are the dumb bunnies of the investment industry. Through repetition, this myth has become powerful—such that fact-checking appears no longer to be required. For example, I recently read an abstract for an upcoming academic article. The abstract states that investors place “substantial amounts of assets into index funds charging high fees (over 2% per year).” I ran the numbers. The substantial amounts turn out to be 0.02% of industry index assets; 2 basis points is the percentage of the U.S. population that lives in Bayonne, N.J. Actually, fund investors are good at selecting funds. The proof can be found by comparing the asset-weighted returns for a fund category in a given year against the equal-weighted returns for that same category. If the asset-weighted returns are superior, then investors have favored better-performing funds. If, instead, the equal-weighted returns are stronger, then investors purchased relatively poor funds. Investors Don’t Hold Typical Funds In conducting this test, I looked at the past 10 calendar years and annualized the returns. The asset-weighted categories win comfortably. The pattern was consistent across all asset classes. The asset-weighted results of large-company U.S.-stock funds were 41 basis points per year better than the equal-weighted results. Those of the four largest international- 68 Morningstar Advisor August/September 2012

Table of Contents for the Digital Edition of Morningstar Advisor - August/September 2012

Morningstar Advisor - August/September 2012
Letter From the Editor
How Much of the Behavior Gap Is Your Fault?
What’s Your View of the Muni-Bond Market?
A Balanced Life
How to Get to Know EMMA
A Strong, Robust Fund Business
Dividend Investing Abroad
Four Picks for the Present
Investment Briefs
Fund Expenses Through the Decades
Autos on Comeback Track
Lessons From the Muni-Bond Rebound
Municipal-Bond Landscape Shifts
Municipal Bonds 101
A Tale of Two Cities
Unraveling the Mysteries of Money
Small Companies Mean the World to Him
The Chinese Art Market and the Origin of Bubbles
The Myth of the Dumb Investor
Stocks That Can Stand the Heat
Our Favorite Mutual Funds
50 Most Popular ETFs
Undervalued Stocks With Wide Moats
The War on Savers

Morningstar Advisor - August/September 2012